The day is playing out perfectly in line with our discussion in The Day Ahead. Because of Yellen's candor in conjunction with the mathematically simple adjustment to trading levels yesterday, there's little need to continue experiencing volatility due to uncertainty. To reiterate:
Yesterday was abrupt because the adjustment to previous expectations was able to be priced in almost instantaneously. We're not likely to be discussing an "ongoing reaction to changes in Fed policy" by next week in the same way it pervaded every waking moment of mid-to-late 2013.
Indeed it's already dying down, and those in the know have already moved on. Think of this in the context of GDP tracking. This refers to the running estimate of GDP that firms update mathematically based on incoming data. For instance, if Business Inventories data surprises to the upside, firms update their GDP tracking based on whatever their equation might be.
While those equations can vary somewhat by firm, the point is that the Business Inventories data would have made for a mathematical, one-time adjustment. The same can be said for firms' "rate-hike tracking" with the yesterday's forecast update being the catalyst for a similar mathematical adjustment. The changes are plugged in to one side of the equation and the new expectations regarding interest rates can immediately be priced in to current trading levels.
As such, it's no surprise to see today's momentum lie in stark contrast to yesterday's precipitous movement. Considering that economic data was mixed to slightly stronger, bond markets are doing "OK" in that they're slightly weaker, but not precipitously so. MBS are just on the edge of suggesting an initial, small negative reprice, but not quite there yet.
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