What Happened Last Week?
Retreat into Recent Rate Range Continued
Bonds were already pushing back into their prevailing range with 3.45 or 3.50% as the floor for 10-year yields, depending on your preference. Friday morning’s data provided an unfriendly nudge in the same direction. Mortgage backed securities (MBS) outperformed with Treasuries not only anxious about early auctions this week, but also in curve steepening mode (i.e. 2-year yields only rose 3bps whereas 10-years rose almost 10bps). All of the movement was/is small potatoes compared to what we will likely see this week after CPI on Tuesday and the Fed on Wednesday.
Source: Matthew Graham, Mortgage News Daily 12/9/22)
What’s on the Agenda for this Week?
Overview
This is a very pivot week! What will it take to flip back to the benchmark and what are the key events for this week?
Three Things
The three areas that have the greatest ability to impact MBS backend pricing this week are: (1) The Talking Fed, (2) Central Bank Palooza and (3) Inflation Nation.
(1) The Talking Fed: On Wednesday will be the Fed’s latest Interest Rate Decision and Policy statement. The bond market has a 50BPS rate hike priced in. However, there still can be a lot of volatility even if the Fed does hike by 50BPS. This volatility can come from one of three areas (or even from all three areas at the same time). These three areas are: the change in the policy statement language compared to the prior statement; the path of rates and inflation in their Economic Projections (dot plot chart); and the live presser with Fed Chair Powell.
(3) Inflation Nation: On Tuesday (the day before the Fed release) will be a very important reading on inflation with the Consumer Price Index.
Treasury Dump
The following is this week’s auction schedule:
- 12/12: 3-year and 10-year note auctions.
- 12/13: 30-year bond auction.
Market Wrap-up
Domestic Flavor
Treasury Dump: There were two auctions today; MBS had little to no reaction to either one. The 3-year note was for $40B and went off at a high yield of 4.093% and a bid-to-cover ratio of 2.55. The 10-year note auction was for $32B and went off at 3.625%. The bid-to-cover ratio was 2.31.
On Deck for Tomorrow: Consumer Price Index, Core CPI, 30-year Treasury Bond auction, FOMC starts two days of meetings.