UMBS opened the day down 8 bps. Stock futures down 4 pts.

Stocks are lower this morning with no significant news, and both bonds and MBS are down. The upcoming week will be focused on the June FOMC meeting and the Consumer Price Index release. The market expects the Fed to maintain current interest rates.

The FOMC meeting will provide new economic forecasts and a revised dot plot, with December Fed Funds forecasting varied chances for rate cuts this year. Following Friday’s strong jobs report, the Atlanta Fed increased its Q2 GDP estimate from 2.6% to 3.1%.

Mortgage credit availability rose in May, marking five consecutive months of increases, though it remains close to 2012 lows.

Traders are bracing for volatility from Wednesday’s CPI report and Fed rate decision, with options pricing in a 1.25% move for the S&P 500. Bond pricing is worse this morning, with the 10-Year Treasury yield rising to 4.465%. This week’s economic data and Fed guidance will likely shape market sentiment for the rest of the year, with many expecting no rate cuts in the near term.

3yr Treasury Auction

• 4.659 vs 4.648 expectations
• bid to cover 2.43x vs 2.57x avg

These are fairly weak stats for a 3yr auction–weak enough to leave a bit of a mark on the rest of the Treasury yield curve (not common for this short of a duration).

Monday ended up being rather uneventful for the bond despite its role as the lead-off hitter for an all-star line-up.  There were no significant economic reports on tap, but the 3yr Treasury auction managed to come in weak enough to prompt a bit of additional selling.  Losses were short-lived and trading levels returned to pre-auction levels about 90 minutes later.  That left a sideways-to-modestly-weaker tone intact for the day as traders wait for ultra-high consequence data and events on Wednesday.

As feared, the bond market was not completely impervious to strong economic data, as seen after Friday’s jobs report.  With Treasury auctions on a condensed schedule this week and significant event risk from CPI and the Fed, we’d operate on the assumption that the risk-aversion pendulum will swing the other way until we get through Wednesday.  In other words, both risk-tolerant and risk-averse clients would be lock biased right now.  Floating is for moon shooters only (glorious when it pays off, but not a high probability shot).

UMBS closed the day down 10 bps at 100.16