What Happened Last Week?
Bigger Picture Bounce or Just Another Pre-Weekend Pause?
Bonds were moderately to sharply weaker on Thursday and deteriorated further on Friday. Given the strong move to 1.25% in 10-year yields the day before, you’d be well within your right to worry about a bigger picture bounce. That said, the bond market is also well within its right to sell off 6bps in Treasuries and 3/8ths of a point in mortgage backed securities (MBS) on the Friday before it has to buy $120 billion of bonds and digest a new CPI in the first 2 days of the following week. In other words, we may not get a great answer about big-picture bounces or pre-weekend pauses until next Wednesday.
What’s on the Agenda for this Week?
This is a very big week with a ton of economic data to absorb, a huge amount of debt hitting the marketplace and a ton of Central Bank action.
The three areas that have the greatest ability to impact MBS pricing this week. (1) Inflation Nation, (2) Central Bank Palooza and (3) Treasury Dump.
(1) Inflation Nation: There will be several key inflationary data points this week with CPI and PPI getting the most attention. Core CPI YOY is expected to rise by 4.0% and Core PPI YOY by 5.1%, Both are at least double the Fed’s “target” rate of 2%.
(2) Central Bank Palooza: Interest rate decisions and policy statements will be issued from the Bank of Japan, Bank of Canada and Bank of New Zealand this week. But the focus will be on our Fed Chairman Powell’s semi-annual testimony as well as the release of their Beige Book which is prepared specifically for the next FOMC meeting.
(3) Treasury Dump: There is a tremendous amount of debt that the U.S. is auctioning off this week. The two note auctions today will be the 3-year and the 10-year. Tuesday’s 30-year Treasury bond auction will be much more important for MBS pricing, though, as it will be after the CPI release.
Treasury Dump: This week kicked off with two auctions. The 3-year note auction was a dud, as the auction rate was 0.476% which is higher than last month’s auction rate of 0.325%. The 10-year note was a mixed bag. Last month the auction rate was at 1.497% and this time around we ended up borrowing at a much cheaper rate of 1.371%. However, direct dealers participated at the lowest level since 2017.
On Deck For Tomorrow: Monthly Bond Coupon Rollover, CPI, 30-year Treasury Bond Auction.