To be fair to the Fed, they didn’t really cause most of today’s weakness. Bond markets already showed their hand with respect to yesterday’s Fed events–essentially endorsing the rate hike, the forecasts, and the balance sheet plan as something that could coexist with 10yr yields in the “low 2’s” and/or mortgage rates under 4%. In other words, markets clearly didn’t walk away from yesterday’s Fed events with a clear urge to bounce toward higher rates.
Despite pressure from the Bank of England announcement at 7am ET, and strong economic data at 8:30am ET, consolidation seemed to be the name of the game. Although we would have liked to have seen it take place closer to yesterday afternoon’s range, consolidation is still essentially what we got. It ended up happening at “interesting” levels as well. In fact, the entirety of today’s domestic 10yr trading took place inside “the gap” that has served as the major floor for the past 8 months.
We’ve dabbled in breaking through the gap, but haven’t been able to hold below on successive days. As stronger close today would have done it, but alas! It looks like bonds are thinking very hard about whether now is the time to break through the gap.
For what it’s worth, MBS underperformed today, as they have even more to think about following yesterday’s Fed balance sheet gameplan. If the Fed manages to make it all the way to the caps announced yesterday, it would essentially erase all of the Fed’s MBS buying. This looks like it’s weighing on MBS’s ability to maintain yesterday’s gains–especially when compared to Treasuries (which have held about half of yesterday’s gains).
One caveat is that MBS have a shorter duration than 10yr Treasuries and duration has been a big deal this week. Look at a 5 day chart of 3yr Treasuries vs 10yr Treasuries. Investors have been more interested in longer-dated bonds.