UMBS starting the week off bad this morning.  Down 39 bps.

Overnight, bond markets weakened, and the reasons behind this aren’t entirely clear. Some attribute it to last Friday’s rally before the weekend and speculation about changes to yield curve control in Japan. Yen and Japanese bonds didn’t perfectly align with the Treasury selling, but the timing suggests a possible correlation.

In any case, 10-year yields increased significantly, reaching 5.02%, the highest in 16 years, by 5:30 am ET. There was some support before the domestic trading session, and more buyers joined in when the CME opened at 8:20 am. Notably, a record number of people are betting against the 10-year bonds.

Additionally, there’s significant news coverage of the escalating situation in Israel/Palestine, with a ground invasion of Gaza seeming increasingly likely.

Wars are extraordinarily expensive affairs, and as to whether or not getting involved in one will “stimulate” economic growth. Please note that since the latest flare up in Israel/Palestine two weeks ago the Treasury 10-year yield is 11 basis points higher.   The US government ended the fiscal year with a deficit of $1.7 trillion. That isn’t helping sentiment in the bond market, as rising rates increase the amount of debt the US must sell in order to cover interest payments. This is part of the reason why bonds can’t get out of their own way.

This week will see all Federal Reserve officials go into the Cone of Silence in the lead up to next week’s FOMC rate decision, though Powell, Waller and Barr will be delivering brief opening remarks at various conferences. The overall message last week was little changed from what we’ve been hearing of late — Higher for Longer is the favored tune in the Eccles Building, with maybe one more rate hike thrown in for good measure.

Redfin reported that new listings are up 1.4%, which is the largest inventory build since Feb 2022.  Some of it is seasonal effect.

It is unfortunate that, due to timing and a few other factors, a tweet by activist investor Bill Ackman is in the best position to receive credit for sparking a 15bp rally in 10yr Treasury yields.  Ackman simply said “we covered our bond short,” which means he is a buyer instead of a seller.  It could also be taken to mean that he thinks yields have mostly topped out as 10s flirt with 5%.  That conclusion is one that much of the market is at least considering according to trading patterns over the past 3 days.  Ultimately, it will still take data to confirm, but restlessness is increasing.  As for the size of today’s move, compared to Friday’s close, it was roughly a 6bp rally by today’s 3pm CME close–not the sort of surge that demands a big, obvious root cause.

UMBS closed the day up a half point!  Quite the comeback!

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