UMBS are down 6 bps on the open. Stocks flat as well with S&P futures up 3.5
Bonds were weaker in the overnight session. As was the case on Tuesday, Treasuries were highly correlated with EU yields, but this time around, it wasn’t with an obvious eye on any underlying data. If we’re looking for motivation, the shape of the yield curve could be the simplest explanation. Even yesterday afternoon, we were concerned about the pace of the correction in the curve. Correlation isn’t necessarily causality, but most of the overnight weakness was a function of curve steepening.
Jobless Claims = 217k vs 218k f’cast, [220k prev]
Continued Claims = 1834k vs 1820k f’cast, [1812k prev]
Wells Fargo sees some cracks emerging in the US economy and forecasts a recession in 2024.
The 10 year auction went off yesterday without a hitch. The bid / cover ratio was 2.45, and yields fell a touch after the results. The Fed Funds futures now see a less-than-10% chance of a rate hike in December, and a 18% chance of a rate cut at the March meeting.
Evidence of disinflation – used cars. The Mannheim index of used car prices fell 2.3% in October. Autos have been a key component of inflation over the past couple of years. Combine the payment shock associated with rising interest rates and you have an outsized negative effect on consumer sentiment.
30yr bond auction = 4.769 vs 4.716 when-issued.
Bid to cover = 2.24 vs 2.37 avg refunding
These are appalling stats, even for the notoriously volatile 30yr bond auction. Investors are putting their foot down on the rally in longer-term rates.
— Stocks retreated and Treasury yields climbed
after Jerome Powell threw cold water on Wall Street’s dovish
wagers by saying Federal Reserve officials aren’t fully
convinced they have tightened enough.
The day began with nominal, inconsequential weakness in bonds. 10yr yields were barely up to yesterday morning’s levels and MBS were doing even better. Neither saw any drama in the first half the day, but both tanked hard after an incredibly weak 30yr bond auction. Powell offered some hawkish reminders an hour later, but if that had any impact on longer-term bonds, it was only to keep yields in the post-auction range (short-term bonds definitely didn’t like it). The auction and the resulting sell-off were significant enough to draw a fairly clear line under the recent trading range in Treasury yields for now. Mark it around 4.50% in 10s. Barring surprises, this likely means the range is the range until next Tuesday’s CPI. The lower boundary is clear. The upper boundary has a few candidates to consider over the next 2 trading days.
UMBS ended the day down 41 bps at 100.39.