What Happened Last Week?
Bonds Obliterated by CPI Reaction and Fed Fear
If the bond market is forced to digest a surprisingly hot inflation report that goes a long way toward undoing much of the recent optimism surrounding a reversal in post-covid price pressures, we would always hope such things don’t happen 3 days before a big Fed announcement with an updated dot plot. But alas! The dots cometh next Wednesday afternoon, and it’s clear that market participants are hedging their bets for some significant migration toward higher forecasts in 2023. That much is clear based on the staggering 24bp jump in 2-year yields. 10s escaped to the 3pm close with “only” 11bps of weakness. MBS lost the better part of a point.
Source: Matthew Graham, Mortgage News Daily 6/10/22)
What’s on the Agenda for this Week?
Overview
Say “good bye” to the 4.50 coupon as the benchmark and say “hello” to the 5.00 coupon. But how long will that last?
Three Things
The three areas that have the greatest ability to impact mortgage backed securities (MBS) pricing this week are: (1) The Talking Fed, (2) Central Bank Palooza and (3) Inflation Nation.
(1) The Talking Fed: On Wednesday, the Fed will issue their Interest Rate Decision and Policy Statement. The market widely expects a hike of 50BPS with many now hedging for 75BPS after last week’s CPI print. But of equal importance is the release of their Economic Projections which is used to create the “dot plot chart”. Their forward guidance in those projections will have a dramatic impact on pricing.
(2) Central Bank Palooza: While our FOMC is getting the lion’s share of attention, there are other major central banks having their own meetings and policy statements this week. Of note are the Bank of England and the Bank of Japan.
(3) Inflation Nation: Last week’s CPI print showed that inflation is still a very real threat to the consumer and the economy and this week with the front end of that equation with the Producer Price Index.
Market Wrap-up
Overview
There were no domestic events today.
MBS are selling off as bid/ask and the lack of demand/purchasers of MBS which started on Friday afternoon and continued through today’s trading session. That is unlikely to change until after the FOMC meeting.
On Deck for Tomorrow
Producer Price Index, FOMC begins two days of meetings.