MBS +8 this morning. Stocks flat

Bonds started the overnight session trading mostly sideways, but rallied more noticeably when European trading started. Oddly enough, Treasuries held the gains even as European bonds retraced back to weaker levels.

US equity futures struggled for traction at the start of a week packed with corporate earnings reports and economic data that may help illuminate the path for interest rates.

Reprice risk on the day is low, shouldn’t see any big swings since there is nothing on the economic calendar today to give rates a direction and Fed members are all gagged for the week ahead of next week’s Fed meeting. I’m expecting that we can see rates get a little choppy this week as economic data rolls out, but they won’t really move too far. In other words I think we will see some movement day-to-day, and we could see some strong reactions in bonds to economic data like we did last week, but overall we aren’t going to see rates really move until the Fed meeting next week (and the jobs data on May 5th).

Reminder:  Next week is the start of the FHFA’s horribly unfair LLPA change to punish people with better credit and down payments – to the benefit of those who don’t.

The Fed Funds futures are pricing in a 90% chance of a 25 basis point hike next week. The June futures see a 25% chance for another 25 basis point hike, and the futures start pricing in rate cuts by the end of the year.

Hedge Funds are short Treasuries across the board, with CFTC data showing a record short position in the 10 year Treasuries. This would appear to be a bet that the Fed will keep hiking rates well above the market’s forecast of 5%. That said, if rates kind of stall out here, we could see a short covering rally this summer. We will get a read on MBS spreads tonight when mortgage REIT AGNC Investment reports its earnings.

Every so often, the bond market has a Monday that does absolutely nothing at all to change the prevailing narrative or introduce any new considerations.  When these Mondays are especially narrow in range and low in volume, they may as well have been an unofficial 3rd day of the weekend.  While we could argue that bonds covered enough ground to have served a bullish purpose, the gains were essentially an affirmation of a sideways range and a correction to pre-weekend position squaring (even if said position squaring was catalyzed by data).