Waller Unintentionally Sends Yields Higher

The most hotly anticipated calendar event at the start of this holiday-shortened week was a Q&A with the Fed’s Christopher Waller, hosted by Brookings.  The questions were as solid as you’d expect from David Wessel and Waller’s answers were informative–at least for market participants who may have misunderstood his role in the current Fed canon. Specifically, Waller has been dovish in terms of his impact on rates of late.  Today, his comments were hawkish–not because they were actually hawkish, but rather because they weren’t as dovish as traders expected.  Rates reacted accordingly with both MBS and Treasuries losing more than a small amount of ground.

Econ Data / Events

NY Fed Manufacturing

-43.7 vs -5.0 f’cast, -14.5 prev

Market Movement Recap

10:29 AM Weaker overnight, but pushing back a bit now.  10yr still up 5.8bps at 3.999.  MBS down 6 ticks (.19).

12:23 PM 2 way weakness after Waller comments, but now at the day’s weakest levels.  10yr up 12bps and MBS down half a point

03:00 PM Additional weakness into the 2pm hour, but bouncing modestly since then.  MBS down half a point.  10yr up 12.3bps at 4.064.

While last week saw a generally narrow range, bonds managed to reverse two weeks of losses with 10yr yields moving down from 4.05 to 3.95.  The gains certainly wouldn’t have been as big without Friday’s PPI data.  As the new week begins (or rather, as it began), bonds are rethinking last week’s level of aggression.  At first glance, it may seem like a big mysterious jump in yields–one that takes the 10yr back into the previous consolidation range.

But we need to keep in mind that the rest of the financial world was open for business on Monday. Treasury futures show that the weakness has been gradual and linear.

The takeaway may not be too different.  In both cases we could say that there was a bit of a short squeeze or a bit too much short covering heading into the weekend and that trading levels are getting back to a more neutral stance from which to digest Fed’s Waller (today) and Retail Sales (tomorrow).

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