MBS are down 28 bps early. Stocks continue their run being up 12 points The overnight session was actually fairly calm and contained for bonds. Volume and volatility started to pick up right at the 8:20am CME open, when many bond traders begin their trading day. Some of the weakness is “just because” (unrelated to any obvious, individual catalyst). Some of the weakness seems to be coinciding with hawkish Fed comments. Here are a few examples:

WALLER: CORE INFLATION NOT MOVING, MAY NEED MORE TIGHTENING. NOT COMING DOWN LIKE I THOUGHT IT WOULD

BARKIN: IF FED BACKS OFF TOO SOON, IT RISKS HAVING TO HIKE MORE

BARKIN: ‘I’M COMFORTABLE DOING MORE’ IF THE DATA WARRANT

BARKIN: SLOWING PACE OF RATE HIKES GIVES TIME TO ASSESS DATA

WALLER: U.S. ECONOMY IS STILL “RIPPING ALONG”

WALLER: “STILL NOT CLEAR” RECENT BANK FAILURES HAD A MATERIAL EFFECT ON CREDIT CONDITIONS. MONETARY POLICY SHOULD NOT BE ALTERED DUE TO “INEFFECTUAL MANAGEMENT AT A FEW BANKS”

We’re seeing a situation now where the Fed is signaling at least two more rate hikes, but markets are stuck on the idea of only one. At this week’s meeting, 12 of 18 Fed members projected the Fed rate would be 5.5 by the end of the year, but markets still only pricing in a high of 5.25 (basically pricing in one more hike in July).

Consumer sentiment = 63.9 vs 60.0 f’cast, 59.2 prev

1y inflation = 3.3 vs 5.2 prev

5y inflation  = 3.0 vs 3.1 prev

New-lease asking rent growth is plummeting! After rising 14.5% Y-o-Y through last May, new-lease rent increases rose just 2% in 5/23 compared to 5/22, and may well turn negative, something that since the Housing Bust only happened during the first few months of Covid in 2020. With new-lease rents barely rising, renewal rent increases are also softening because rental vacancy rates have risen by a substantial two percentage points Y-o-Y

Bonds might have had a chance to hold steady today–and to be fair, they did hold steady in the bigger picture–but some combination of Fed speakers and position-squaring resulted in a morning sell-off.  The afternoon was a dud with no major movement in either direction.  Next week brings several Fed speakers that may help us figure out if the views expressed on Friday are widespread.

MBS lost 16 bps on the day.  Stocks also down 16.