MBS pretty much flat on the open. Stocks too, only up 6 points.

Bonds were stronger in the overnight session with most of the gains following a risk-off trade in Europe (lower stock prices and lower bond yields). US traders initially bought the rally at the 8:20am CME open, but that didn’t last long. Volume and selling momentum picked up at 9am and have now almost fully erased the gains.

Jerome Powell’s comments last week pretty much stuck the fork in bets for rate cuts this year. While the comments didn’t impact the July futures all that much, the December futures now predict that the Fed Funds rate at the end of the year will be 25 basis points higher than it is now. Interestingly, they are not predicting the two hikes that the dot plot predicted.

It wasn’t that long ago, that the futures were handicapping a Fed Funds rate around 4.5%. The Fed has instituted a drastic tightening policy, the likes of which we haven’t seen in 40 years. Historically tacking on 500 basis points of tightening would cause a recession, and we simply haven’t seen one yet.

Reprice risk is low on the day, no economic events other than a 2yr Treasury auction this afternoon and no Fed speakers today to shake it up. The outlook remains the same… locking is a conservative call but the potential to see rates move lower from here is small and I really do think at some point markets are going to start pricing in that second Fed rate hike which would push rates higher.

Bank deposits rose by $17.6B after dropping $78B the week before.  Good sign that could result in less bank bond selling.  Because the banks won’t have to sell them in order to refund deposits.

It was an uneventful, boring, uninspiring, and unenlightening summertime Monday in the bond market–the kind that would have been put to far better use in the construction of another 3-day weekend.  But alas!  It happened (barely) and that leaves us with the unpleasant task of finding anything meaningful to observe.  Such days reduce the analysis to focusing on technicals and bigger picture themes.  On the technical front, 10s battled the 3.72% range floor yet again, but failed to maintain the breakout.  The bigger picture theme of “recession and disinflation” versus “a surprisingly persistent status quo” received no compelling new evidence today (which makes it easier to reconcile the flatness).

MBS closed up 5 bps.  Stocks lost about 20 points.