Bonds Bounce Back on CPI After Opening Weaker
MBS opened 5 ticks weaker after Treasuries spent the overnight session moving steadily higher. As has been the case of late, stocks and bonds continued moving together, but this time back toward riskier territory. Of particular note was the move higher in German Bund yields as it's basically another bounce at all time lows.
The morning's only 8:30am data--CPI--has marked a turning point in the weakness. In fact, Fannie 3.5s just made it back to positive territory 10 minutes after the data. 10yr yields are down from 2.505 to 2.478. Here's the run-down:
- June CPI +.2573 vs +.3 forecast
- Core CPI +.1291 vs +.2 forecast
- Food +0.1, Housing +0.1
- Inflation-adjusted average earnings +0.0 vs -0.1 previously
This reaction is very important because it's by far and away the most pronounced response to CPI data in at least 4 years. And for most of that time, it was an utter non-event. In other words, we knew the day would come where markets would begin tuning back in to the price index data series. Although we've noted a slight uptick in interest in recent months, today's leaves nothing to the imagination.
In today's case, it looks like some market participants are/were defensive about the possibility that inflation could come in stronger than expected. The simplest conclusion is that they're increasingly expecting changes in Fed policy based on inflation metrics. That stands to reason considering the other half of the Fed's mandate (employment) is already showing the steady improvement needed in order to consider raising rates. The more inflation we see, the sooner the Fed is seen raising rates. As a final exclamation point on that thought, short end rates (those most tied to Fed Funds rate) are in positive territory while 10yr and 30yr Treasuries aren't quite there yet.