Wednesday – November 13, 2024
UMBS are UP 35 bps – for once – on the open. About time. S&P futures ae up 10.5 points
Bonds are responding favorably to the just-released CPI data, despite the as-expected result. There are two probable reasons:
- The unrounded core monthly reading was 0.28
- Without the shelter component, CPI would be at the Fed’s target (or close enough, at 2.1% year over year at the core level, and well below target for “all items, less shelter” at 1.3 year over year)
Core CPI M/M = 0.3 vs 0.3 f’cast, [0.3 prev]
(unrounded 0.280)
Core CPI Y/Y = 3.3 vs 3.3 f’cast, [3.3 prev]
The burden of proof remains on economic data to make a case for any significant improvement in rates. In other words, don’t expect big, sustained improvement without markedly weaker data/inflation. Additionally, volatility potential remains elevated surrounding the election trade. This is an asymmetric risk environment that continues to heavily favor locking vs floating until further notice (this doesn’t mean rates can’t drop here and there, but it does mean there’s not currently a reason for them to drop very much or for very long unless data makes a case for it).
Bonds began the day in modestly weaker territory but quickly rallied after the CPI data. The rally was informative, both in terms of its moderate size and high volume. It reinforced our assumption that inflation data was back on the menu of big ticket market movers after taking a distant back seat to the jobs report. The initial reaction was short-lived though. Gains only stuck around for the shortest-term bonds. 10yr yields ended up moving higher by several bps while MBS maintained modest gains thanks to their shorter implied duration (i.e. we continued to use 10yr Treasuries as a big picture rate benchmark, but MBS trade more like 5yr Treasuries these days).
Rationale is in short supply for the selling because there were no clear, individual motivations. Instead, we are forced to point to a slew of Fed speeches that were collectively more hawkish. Beyond that, one might offer some conjecture about anticipated fiscal impacts from various political developments, but that narrative is certainly getting a bit tired at this point.
UMBS closed the day up 15 bps. Sure tried to give it back. That was 23 bps below the highs on the day. Closed at 99.00