MBS starting the week pretty much flat.

Bonds began the overnight session in moderately weaker territory, although it looked significantly weaker at times due to a market holiday in Japan. The problem was exclusively seen in cash Treasuries (not futures, which actually were trading as opposed to just having bids entered electronically by a fat fingered broker).

Once European traders started participating, cash Treasuries moved in line with futures and all was relatively well. Bonds were just a bit weaker into 9am, but recovered somewhat at the 9:30am NYSE open. US stock futures fluctuated after Friday’s selloff and as oil neared $95 a barrel, highlighting inflationary pressures just as policymakers prepare for interest-rate meetings.

The big event this week will be the FOMC meeting on Tuesday and Wednesday. The consensus seems to be a hawkish pause, where the Fed maintains the current Fed Funds rate and signals one more hike in the dot plot. Investors will also be looking at clues for when the Fed will start cutting rates.

The Atlanta Fed’s GDP Now index sees Q3 growth at 4.9%. This still seems way out of step with most economists which are closer to 3%.

After last week’s economic data ebbed and bonds sold-off with Europe on Friday, we knew we’d likely be waiting until Wednesday’s Fed events for the next significant bond market input.  That leaves the path of least resistance as a generally sideways range just under the long-term high yields.  AM trading was weak enough to approach those highs without breaking them (the actual 10yr high today is 4.358, not the 4.415 seen in many charts due to reasons discussed in this morning’s commentary).  The rest of the day was spent rallying calmly back into the range but not forcefully enough to be interesting.

MBS closed up 18 bps on the day.  Closing at 98.22 on the 5.5% bond, we are in the lower bounds of a narrow range with the 25 day avg just below and a ceiling at 98.601.