MBS -.27 on the open. 10y is up 10 bps.
Bonds were moderately to sharply weaker in the overnight session, led by a risk-on trade in Europe. The absence of new drama in the banking sector allowed investors to take another step back toward levels of risk exposure that are still quite far away (German Bunds still roughly 50bps lower than 2 weeks ago). The emphasis on the risk-on ($ goes bonds > stock) trade was driven home by the fact that EU econ data was decidedly weaker–something that would otherwise result in bond buying as opposed to bond selling.
Fed starts it’s rate deliberation today with announcement tomorrow.
The Fed raises the Fed funds rate to tighten both financial conditions and lending standards. They in turn result in reduced lending and investment, which leads to slowing economic activity, and usually a recession. Since the SVB debacle, financial conditions and lending standards have quickly tightened, and by the equivalent of a staggering 150bps, more than the sum of the Feds last three rate hikes dating back to 11/2/22.
First Republic might get a capital injection. The Wall Street Journal reported that the consortium of banks that deposited $30 billion at the troubled bank are looking at converting those deposits into a capital infusion. The news (along with the Credit Suisse merger) has improved sentiment in all of the regional banks, including Western Alliance, PacWest and US Bank.
The FOMC starts its two day meeting today. The Fed Funds futures are forecasting a 80% chance of a 25 basis point hike. Overall, the Fed Funds futures are getting more hawkish as the market bets the banking crisis is over. That might be wishful thinking, but so far the markets are in a risk-on move.
Today’s trading session turned out to be every bit as simple as it seemed like it would be this morning. Why so simple? There were clear indications that improved sentiment in the banking sector was fueling a ‘risk-on‘ trading pattern in Europe (i.e. stock prices and bond yields moving higher together). This extended to US markets, but especially to Treasuries. MBS actually outperformed, which isn’t too shocking considering Treasuries were the star performers when the market was trading in a risk-off direction.