UMBS 6.0% coupon were down another 20 bps this morning.  The 5.5% is down 25.

The US Treasury market extended losses for a fourth day, putting the 10-year yield near 4%, reflecting investor caution ahead of the release of fresh economic data and the Federal Reserve’s meeting minutes.

Traders awaited US manufacturing, job openings data and minutes from the Fed’s last policy meeting due later on Wednesday to get a better sense of whether the sharp rally in Treasuries and expectations of deep interest-rate cuts this year are justified. Swaps pricing points to about 145 basis points of cuts through December. Recent remarks by FOMC officials suggest they’re worried the unemployment rate is on the verge of a persistent increase

From Elliot Eisenberg: 2024 likely won’t be a year of great economic growth because fiscal policy will be increasingly contractionary, savings rates will necessarily stop falling, and bank lending and thus the money supply will continue contracting. Additionally, the interest rate insensitivity exhibited so far by households and businesses in the face of high interest rates works in both directions, therefore the expected rate cuts may not be as stimulative as hoped.

Bonds were moderately weaker in the overnight session with 10s hitting 4% for the first time since Fed day 3 weeks ago.  The 10am data was hotly anticipated and the volume response confirms it.

Job Openings (JOLTS) = 8.79m vs 8.85m f’cast  [8.852m prev]

ISM Manufacturing = 47.4 vs 47.1 f’cast   [46.7 prev]

The U.S. manufacturing sector continued to contract, but at a slightly slower rate in December as compared to November. Companies are still managing outputs appropriately as order softness continues.

Richmond Fed President Thomas Barkin said that he sees the US economy on a glide path for a soft landing.  This is making the markets feel that the Fed thinks they can land where they need to be – without cuts.

The first two days of the new year were shaping up to paint an unpleasant picture for the bond market in which the strong rally in Nov/Dec faced the prospect of technical correction.  That risk remained through the first few hours this morning, but things began to change after the JOLTS data (not at first, but eventually!). As losses turned to gains in the afternoon we had fresh proof of concept for the prevailing “data dependent” narrative for rates.  JOLTS wasn’t even bad, per se, it was merely the first time we’ve seen consecutive months under 9m since job openings were still on the way up in 2021.  At the risk of reiterating the obvious, Friday’s jobs report will tell us even more about data dependency.  On a side note, Fed Minutes helped–primarily due to the nod to an eventual winding down of quantitative tightening (something that came through better in today’s minutes than in the press conference 3 weeks ago).

UMBS ended the day up 8 bps on the 6.0.  The 5.5 gained 6 bps.   The 6.0 ended at 101.38

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