What Happened Last Week?
AM Rally Completely Erased by the Close
Friday morning’s paradoxical rally lasted 30 whole minutes. Bonds turned around at exactly 9am and proceeded to completely erase the AM gains. There were no compelling macro motivations for the reversal apart from a modest rise in oil prices. While oil price lows and highs perfectly matched bond yields in terms of timing, the bond selling was disproportionately larger. This is highly suggestive of short covering being a component of the morning rally. In other words, traders who had open bets on higher rates simply closed those positions quickly in the morning. From that point on, the market was free to trade as it pleased. 2-year/10-year spreads remained mostly flat which suggests broad selling across the curve and no change in the paradoxical sentiment component of the AM rally. Bottom line: there were two rally motivations Friday morning, and one of them left the bond market open to correction.
Source: Matthew Graham, Mortgage News Daily 9/11/26)
What’s on the Agenda for This Week?
Overview
The week starts off under pressure due to rising oil prices.
Three Things
The three areas that have the greatest ability to impact MBS backend pricing this week are: (1) The Talking Fed, (2) Texas Tea, Black Gold and (3) Central Bank Palooza.
(1) The Talking Fed: There is a lot of weight on Wednesday’s FOMC meeting with the long bond market hedging for a 25BPS hike after last week’s PPI and CPI data (as well as a huge surge in oil). But there is still a strong potential for a “hold” with several dissenting votes (Waller and Bowman at least). This is also a meeting where they issue their Summary of Economic Projections from which the famous “dot plot chart” is derived. The bond market will be very sensitive to future inflation and interest rate projections.
(2) Texas Tea, Black Gold: The week began with a key oil pipeline attacked and taken offline which already has WTI up almost three bucks this morning.
(3) Central Bank Palooza: The next central bank up is Bank of England on Thursday.
Market Wrap-up
Quite day for data with MBS feeling the pressure of WTI currently up $1.57. But it was up much more than that in earlier trading, so MBS have come off of their worst levels as a result.