UMBS were up 9 bps in early trading.

Global bond markets steadied after the biggest two-day selloff in months, while stocks looked for

direction amid mixed earnings.  Investors continue to fret over the timeline for interest rate cuts while the Fed continues to point to recent strong economic data that could delay or postpone the use of rate cuts.

Minneapolis Fed President Neel Kashkari wrote an essay on monetary policy. In it, he discusses how tight monetary policy currently is and how to measure that tightness. He addresses the argument that monetary policy is getting tighter because the Fed Funds rate is stable in the context of falling inflation. If inflation has fallen by 3% over the past year, that implies the real Fed Funds rate has increased by about 3.6%.

He believes that is one way to look at the issue, however he prefers to look at the yield on the 10 year TIPS – or inflation-protected securities. Under this model, real rates have risen about only 60 basis points. Since the economy has remained so resilient, he considers whether monetary policy is as tight as the first model suggests. “The implication of this is that, I believe, it gives the FOMC time to assess upcoming economic data before starting to lower the federal funds rate, with less risk that too-tight policy is going to derail the economic recovery.”

This is one vote for the higher-for-longer outlook.

Whereas the bond market had obvious, individual motivations for all phases of the sharp sell-off over the previous two business days, today’s rally was far more mysterious.  To be sure, a 7bp rally in 10yr Treasuries doesn’t need any substantive fundamental justification if it follows hard on the heels of an almost 30bp sell-off, but it’s always nice to keep track of what matters.

In this case, it may be seller exhaustion and 2024’s technical ceiling matters more than fundamentals.  We also noted correlation between geopolitical headlines and the sharpest leg of today’s rally, but remain unsatisfied in the logic required to connect those dots.  Satisfaction aside, we’ll take the rally and hope to see validation in Wednesday’s 10yr Treasury auction.

UMBS closed the day up 25 bps at 101.02

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