Straightforward Session as Traders Wait For More

Monday ended up being rather uneventful for the bond despite its role as the lead-off hitter for an all-star line-up.  There were no significant economic reports on tap, but the 3yr Treasury auction managed to come in weak enough to prompt a bit of additional selling.  Losses were short-lived and trading levels returned to pre-auction levels about 90 minutes later.  That left a sideways-to-modestly-weaker tone intact for the day as traders wait for ultra-high consequence data and events on Wednesday.

Market Movement Recap

09:58 AM modestly weaker overnight and little-changed since then.  MBS down 3 ticks (.09) and 10yr up 1.5bps at 4.476

01:40 PM a bit weaker after 3yr Treasury auction.  10yr up 2.8bps in total on the day at 4.489. MBS are down an eighth of a point in 6.0 coupons

03:20 PM Recovering some of the post-auction weakness now.  MBS down 3 ticks (.09) and 10yr up 1.9bps at 4.48

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The Consumer Price Index (CPI) has done more than any other report to shape trends in the bond market in the past year.  At times (such as the middle and end of 2023), CPI provided hope that inflation was moving back down to target levels.  At other times, such as Q1 2024, it’s suggested a troubling resurgence of elevated inflation.  This week’s installment isn’t exactly in a position to put any debates to bed.  If it’s higher than expected, it would suggest the market continues waiting for better evidence of a shift.  But if it’s lower than expected, traders will increasingly view Q1 as the last unexpected push before a better chance at a turning point. With the Fed out with a new dot plot that same afternoon, there’s a lot at stake this week, but you wouldn’t necessarily know it based on the slow, sideways trading in place at the start.

Today’s only potentially relevant calendar item is the 3yr Treasury auction at 1pm.  Shorter term auctions are less likely to cause a reaction, but it’s not out of the question. 

The Massachusetts House passed a bill that would ease the process for property owners looking to build accessory-dwelling units.

A Fannie Mae survey-high 86% of prospective buyers said it was a bad time to buy a home in May.

Sen. Elizabeth Warren, D-Mass., a powerful member of the Senate Banking Committee’s progressive wing, said that the Federal Home Loan banks have “failed to deliver on their housing and community development mission.”

In recent years, the wealth gulf between white and Black families has only grown. But there is hope that advances in fintech, such as wider adoption of artificial intelligence, can help.

Observers say the stronger-than-expected Bureau of Labor Statistics employment data could leave the Fed pondering when, or even if, to cut short-term rates this year.

What Jobs Report? Bring on CPI and the Fed

Bonds made it almost all week putting on a superhuman display of immunity to bad news, but Friday’s jobs report was the kryptonite.  Whether or not a trader has any criticism for volatility in the payrolls data, they still agreed on the move with 10yr yields up nearly 15bps by the close.  MBS outperformed nicely, as we were hoping they would, thus limiting the worst possible rate sheet outcomes.  In fact, we’re ending the week in better shape than the last and thoughts have already turned toward next week’s bigger ticket events (CPI on Tuesday and the Fed on Wed).  And yes, this is a “dots” meeting for the Fed… 

Econ Data / Events

Nonfarm Payrolls 

272k vs 180k f’cast, 175k prev

Unemployment Rate

4.0 vs 3.9 f’cast, 3.9 prev

Market Movement Recap

08:36 AM Much weaker after jobs data.  10yr up 13.7 bps at 4.425.  MBS down more than half a point.

11:12 AM Holding AM losses uneventfully after modest bounce.  10yr up 12.9bps at 4.417 and MBS down 3/8ths.

01:50 PM Still very little movement relative to AM losses.  MBS down 13 ticks (.41) and 10yr up 13.7bps at 4.425

03:43 PM Stick a fork in the bond market.  It’s done for this week and nothing interesting happened today after the first few minutes following NFP.  Trading levels right in line with the last update… still

Whether it was a magical combination of Treasury auction timing and new month trading or a legitimate shift in response to Monday’s ISM Manufacturing data, the bond market seemed to be in a hurry to get in position for a shift in the pace of economic growth.  This sentiment was so entrenched that a very strong ISM Non-Manufacturing reading on Wednesday didn’t even come close to derailing it.  But bond bulls are forced to acquiesce–at least to some extent–after this morning’s exceptionally large beat in nonfarm payrolls (272k vs 185k f’cast). 

Bonds haven’t enjoyed it so far.

If there’s still a case to be made for optimism, it’s that yields are “only” up into the low 4.4’s–still not even halfway back to last week’s highs.