UMBS were down 11 bps on the morning.

Bonds were almost perfectly flat overnight with 10s trading in a narrow range between 3.89 and 3.93.  The first discernible move of the day arrived just after 8:45am ET.  While this coincided with comments from Fed’s Goolsbee, correlation is not causality.

US stock futures ticked higher, even as central bankers sought to sow doubts that aggressive interest-rate cuts will materialize early next year.  European Central Bank Governing Council member Bostjan Vasle joined a chorus of officials tempering market optimism about rate cuts. His cautious tone came after New York Fed President John Williams last week said bets on a March reduction were premature, and ECB President Christine Lagarde said the bank had not discussed cuts at all.

For now, market optimism is proving resilient

We had a lot of Fed-speak after the FOMC meeting which seems to pour cold water on the narrative that rate cuts are coming quickly and aggressively. It seems like the Fed is worried that the markets are over their skis with respect to rate cuts.

On Friday, New York Fed President John Williams said “We aren’t really talking about rate cuts right now,

Fed members Gooolsbee and Mester spent the morning walking back the Fed rhetoric from last week.  Saying the market is getting ahead of itself.  Especially in the rate cuts.  Chicago Fed President Austan Goolsbee said that he was “confused” at the market reaction to the FOMC forecasts.  Atlanta Fed President Raphael Bostic sees rate cuts beginning in the third quarter of 2024.

The Fed’s favored inflation measure, the PCE Core, expected to come in at a 3.3% annualized pace, down 0.2% from the previous month. While 3.3% remains quite a ways from the central bank’s 2% target, it is also quite a ways away from the 5.6% local high seen in February 2022, and markets are forward looking things and are counting on about six rate cuts by the end of 2024. Just six weeks ago, expectations were for just three.

Through the 3pm CME close, today’s trading volume in longer term Treasuries was the lowest in months and one of the lowest non-holidays of the year.  There were several Fed speakers making the rounds and several of their comments seemed like the sort of thing that might get the market’s attention, but there was no discernible reaction.  Bonds began the day sideways, lost some ground early in the session for unknown reasons (could be Europe, oil prices, or year-end positioning), and stayed almost perfectly flat for the rest of the day.  There will be more economic data as the week progresses, but fewer traders left in the office to react.

UMBS 6.0 closed up 5 bps.   5.5 coupon lost 5 bps

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