As is usually the case with big volume moves following anticipated data, it’s too soon to tell whether or not bond markets will continue to rally in the wake of the just-released Minutes from the FOMC’s last policy-setting meeting. Moreover, while volumes surged following the release, the price/yield action has been more of a two way street with MBS and Treasuries giving up a small amount of the immediate gains to fall back in line with the day’s previous best levels.
That said, the tone of the Minutes was generally positive for market participants who are expecting a 3rd round of quantitative easing. In fact, it’s almost as if they were greasing the proverbial skids for the September policy announcement to include some form of stimulus. Here’s one snippet from the release that does a good job of laying out the FOMC’s sentiment and at the same time, accounts for the “what if’s” between now and then:
“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”
The key word here is SUBSTANTIAL. Most would agree that recent economic data has improved moderately in some cases, but even the bullish data doesn’t connote a “substantial” improvement in the pace of the recovery. From there, we’d look next at “fairly soon,” and likely take that to mean “this upcoming meeting or the next, but likely before the end of the year in any event.”
So that’s it, in a nutshell… In many ways, the same as it ever was.. If the economy doesn’t improve more quickly than it has been, expect additional QE. Markets are obviously already fully onboard this ship as they haven’t really moved much in the 15 minutes since the Minutes were released.
For now, MBS are a tick or two better than they were, but aren’t trading above their previous highs. 10yr yields are almost exactly in line with the sideways levels that prevailed leading up to the Minutes, and stocks popped quickly to morning highs, but have bounced lower since then. Things could still go either way, but seem to be tilted slightly positively for bond markets at the moment. Positive reprices are a possibility.