What Happened Last Week?
Making Sense of Rising Rates And The Risks Ahead
The bond market returned from a 3 day weekend to find yields surging higher on Tuesday. That pushed mortgage rates to fresh 2-year highs and added emphasis to what has already been the sharpest rate spike since late 2016. Why are rates rising so quickly?
Continue reading: Matthew Graham, Mortgage News Daily 1/21/22)
What’s on the Agenda for this Week?
Overview
This week could prove to be very volatile and pivotal.
Three Things
The three areas that have the greatest ability to impact mortgage backed securities (MBS) backend pricing this week are: (1) Central Bank Palooza, (2) Inflation Nation and (3) GDP.
(1) Central Bank Palooza: Wednesday is a very pivotal day as there will be key interest rate decisions from the Bank of Canada and our own Federal Reserve. The bond market will be very focused on the path of QE…will it end in February or March? QT…will they set the stage for balance sheet tightening after March? Rate hike(s)? Will they have a rate hike at this meeting or telegraph 3 or even 4 rate hikes for this year? The answers to these questions will have a dramatic impact on backend pricing.
(2) Inflation Nation: Tthe Fed’s preferred inflationary measure, PCE, will be issued on Friday. Regardless of what the Fed does/says on Wednesday….the PCE report on Friday will cause bond traders to hedge towards more aggressive action from the Fed if the Core PCE comes in at 4.7% or above (estimates are for 4.8%).
(3) GDP: Tthe preliminary (will be revised several times) 4th quarter GDP data will be issued, which is expected to be well above 5.0%. Bonds perform very poorly with GDP above 3.00%.
Treasury Dump
Here is this week’s Treasury note auction schedule:
01/24: 2-year note
01/25: 5-year note
01/27: 7-year note
Market Wrap-up
Treasury Dump
It was a strong 2-year Treasury note auction. $54B went off at high yield of 0.990%. The bid-to-cover ratio was high at 2.81.
On Deck for Tomorrow
FOMC begins two days of meetings, Case Shiller Home Price Index, FHFA Housing Price Index, Consumer Confidence, Richmond Fed Manufacturing, 5-year Treasury note auction.