Bond Markets Slightly Weaker; Holding Ground After 1st Round of Data
To be sure, the outdated home price reports from Case-Shiller and the FHFA are hardly ever up to the task of inspiring market movement. This morning is no different as all the activity--which was limited in the first place--was seen leading up to the data.
It all showed up in the 8am-9am hour as the overnight session saw Treasuries move almost perfectly sideways in an exceptionally narrow range. When domestic trading started picking up for the day, the theme was clearly an unwinding of recent flattening momentum.
What does that mean?
When we talk about the 'yield curve,' we're talking about Treasuries (because they're the risk-free benchmark for other fixed-income securities like MBS) ranging from short to long maturities (think 2, 5, 7, 10, and 30yr Treasuries). The yield curve is simply the shape of the line that plots the yields of those securities vs their maturity.
Most of the time, 2yr yields are the lowest and 30's are the highest (yield curve ascending from left to right). If 10's and 30's get higher and 2's-5's get lower, that line is getting steeper, a phenomenon that's logically-enough called 'steepening.' Vice versa for flattening (10 and 30yr yields falling while 2-5yr yields are rising, relatively).
After last week's FOMC forecasts showed a bit more of a consensus for sooner/higher rate hikes, the short end of the yield curve took the biggest hit because it's closest to ground zero in the event of a rate hike. Sometimes when the short end is sold, the money goes into other assets, and other times, it simply goes into the longer end of the yield curve. In other words, "sell 2-5yr Treasuries to buy 10 and 30yr Treasuries," i.e. a "flattening" bet.
Flattening momentum persisted through yesterday and this morning's trading is telling us markets had enough of that for now. As such, shorter-dated maturities are in slightly positive territory and longer maturities (with which MBS tend to identify a bit more) are in negative territory.
All that having been said, the push back against recent flattening is more likely to look like a correction than to proceed into a prolonged 'steepening' move. It's already leveling-off for today with the next impact probably coming from the 10am economic data.