While the overnight session was slightly weaker and the 10yr auction made things that much worse, the day's main event was undoubtedly the FOMC Minutes. There are two ways to look at the reaction.
The less interesting, more cynical way to account for the strong move after FOMC is to say that markets were preparing for something more negative. And when they didn't get any bad news, a relief rally ensued.
But that's pretty boring and probably not accurate.
The run up to the FOMC Minutes release really began yesterday at noon. Bond markets had just rallied nicely for two days and after the European session closed, Treasuries/MBS began heading slowly and steadily into weaker territory.
That grinding trend-channel continued right through the overnight session (in Treasuries anyway, MBS were asleep) and into today's auction. In the grand scheme of things, the auction made for a nasty little bump in the road, but didn't exactly alter the broader trend. Here's what it all looks like:
It's possible--even probable--that bond markets were ready to go either way depending on the read of the Minutes. After all, the recent range is narrow enough that doing either from 2.60 is not too much to ask. The hesitation immediately following the release is most likely attributable to the QE termination timing discussion where October looks increasingly likely compared to December.
But as market participants dug deeper into the text of the Minutes (beyond the headlines), they saw a SIGNIFICANT discussion on the timing of the end of reinvestments. This is the bond-buying that the Fed does with the proceeds from it's portfolio.
Last year, the party line was that reinvestments would stop before the rate hike. A few Fed speakers grew more vocal this year in saying the Fed shouldn't be so quick to end reinvestments. The discussion was important enough to markets that it was the most likely market-mover at the last FOMC Minutes release as well, but in the opposite direction (because markets were expecting to see a more thorough discussion--much like today's).
When that discussion instead came today, we got the rally that was priced-in back in May (seriously... it was the same 4+ basis point move then and now). Why is this reinvestment business so important? Quite simply because this will be the Fed's "bond buying" between the end of QE and whenever reinvestments cease. This is running at $16 billion per month currently, which is still a majority of new TBA production.
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