Bonds Weren’t Prepared For Fed’s Inflation Fears

If anything, you’d think the market would have been pricing in a hawkish Fed day, given the run up in energy prices. But Powell threw reporters a curve ball during the press conference and instead placed the focus on other categories of inflation that were under the microscope before the energy price spike (like core goods and non-housing services), saying there’d been less progress than hoped. The takeaway was that rate cuts are on hold for the foreseeable future. The market agrees, as it is now pricing the next rate cut at more than a year in the future. Bonds were already losing ground on oil price spikes (and PPI to a lesser extent). The net effect took yields back near recent highs and hit MBS for almost half a point.

Econ Data / Events

Core PPI m/m (Feb)

0.5% vs 0.3% f’cast, 0.8% prev

Core PPI y/y (Feb)

3.9% vs 3.7% f’cast, 3.6% prev

PPI m/m (Feb)

0.7% vs 0.3% f’cast, 0.5% prev

PPI y/y (Feb)

3.4% vs 2.9% f’cast, 2.9% prev

Market Movement Recap

08:32 AM Slightly weaker after PPI data. MBS unchanged after being up a few ticks and 10yr up .8bps at 4.207

09:16 AM additional weakness with oil prices spiking.  10yr up 2.8bps at 4.227 and MBS down more than an eighth of a point

02:12 PM modestly stronger after Fed announcement. MBS still down 3 ticks (.09) and 10yr up 1.5bps at 4.214

02:57 PM MBS are now down 9 ticks (.28) and 10yr up 5.3bps at 4.253

04:13 PM Weakest levels. MBS down nearly half a point and 10yr up 6.6bps at 4.266