Heading into the end of last week, bond markets were like a space shuttle preparing for launch. The earth was like a 10yr Treasury yield at 2.57 and space was somewhere between 2.75 and 2.82. Everything was going according to plan. The countdown was read so clearly that we called attention to the impending lift-off on Friday. Yields indeed began lifting-off on Monday, but were suddenly halted by yesterday's Retail Sales data.
Is that it then? Is this mission scrapped? Will the Space Shuttle Refi remain close enough to earth to accept more passengers?
In assessing this potential, the first order of business is to highlight the current differences between Treasuries and MBS. Of course our primary concern from a day to day standpoint is MBS, but as long as they're keeping relative pace with Treasuries, the latter is the better tool for the bigger picture. As such, my policy is to ask (and sometimes answer) the big questions as they relate to broader bond markets while keeping an eye on MBS for bigger instances of deviation from their Treasury yield benchmarks.
The past week and change has been such an instance. MBS began outperforming into month-end and last week's settlement for Fannie/Freddie 30yr coupons. Even after taking a hit from the roll (seen below as a sharp move higher in the green line), they continue to outperform 10yr yields based on how their levels lined up in April.
There are two ways to view this. In a more negative light, we can think of this outperformance as something that will need to be paid back. On the other hand, this bout of outperformance (they tend to come and go) is the more stable and longer-lasting than other 2014 examples, so we'd be within our right to hope it's more of a trend. In any event, rate sheets were just at the best levels since November last week, even though Treasury yields were not.
With the caveat out of the way, let's assess that broader landscape via 10yr yields. Did Retail Sales derail the lift-off? The short answer is "not yet," but we'll need to see how the shorter term trend inside the teal lines holds up. If yields break above 2.66, the lift-off is officially back on. If they break the lower teal line (in the 2.61 neighborhood tomorrow), the lift-off may be cancelled. Anything in between is equivocal.
Today's data doesn't have nearly as much market-moving potential as yesterday's. The only significant report is the Producer Price Index at 8:30am, expected at +0.2 after +0.6 (core) previously.
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