Oil prices are always interesting to consider when it comes to bond markets.  After all, oil is a major cost input for the economy.  Even the "core" inflation readings, which disregard oil prices, are unable to account for oil's impact on the price of everything else.  Point being, if fuel is being burned to transport all the goods that still show up in core inflation readings, oil is still having an impact.

From there, of course we can consider that bonds are supposed to care about inflation.  They generally do, apart from the moments in history where very few market participants were remotely concerned about it, regardless of the numbers (2012 and 2016 come to mind).  But now that core inflation has edged back to (or above, depending on when you look) the 2% level, bond markets are paying more attention.  It would stand to reason that bonds might also be paying more attention to a key input for prices like oil.

2018-11-27 open

In the shorter-term, most of the correlation between markets has existed between stocks and bonds.  This won't always be the case, but it's common during times when stocks are losing ground more rapidly than normal.  Oil prices sort of get lost in the shuffle here.  If we zoom out to the much bigger picture, things change.

2018-11-27 open2

The previous chart starts in 2015 because if we went back any farther, oil's y-axis would be distorted by the huge losses in 2014.  Believe it or not, the 2014 move was mainly a product of ECB stimulus.  The ECB had finally pulled off the impossible by getting approval for its first real quantitative easing program, and the Euro currency tanked badly.  When the Euro is tanking, the US Dollar is rallying.  A rallying dollar means that oil prices (which are dollar-denominated) move lower.  This adds another layer of complexity when considering the impact of oil on other markets.  Reason being: we'd also need to consider the impact of currency valuations, since they're very closely tied to oil prices.

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Considering currency valuations is tricky business as it relates to the bond market.  There's really no reliable way to do it.  In fact, the only way I've ever been comfortable approaching such a thing is to consider rallying US dollars exerting downward pressure on oil prices which, in turn, put at least some downward pressure on inflation and ultimately, interest rates. 

With all that in mind, the most recent drop in oil prices fits nicely with bonds' ability to hold their ground after hitting long-term high yields earlier this year.  It's not the biggest story or the biggest consideration for bonds--not by a long shot--but at the very least, it keeps the soil fertile enough for the seeds of a rally to take root.  Those seeds would simply need to be cast by a more meaningful factor for bonds (econ data, stock losses, change in Fed policy stance, etc).

On a final and unrelated note: expect changes in conforming loan limits presently.  They are typically released concurrently with FHFA's September House Price Index (which is out this morning).


MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
MBS
FNMA 4.0
100-06 : -0-02
Treasuries
10 YR
3.0700 : +0.0000
Pricing as of 11/27/18 9:31AMEST

Tomorrow's Economic Calendar
Time Event Period Forecast Prior
Tuesday, Nov 27
9:00 CaseShiller 20 yy (% ) Sep 5.3 5.5
9:00 Monthly Home Price mm (%) Sep 0.3
10:00 Consumer confidence * Nov 135.9 137.9
13:00 5-Yr Note Auction (bl)* 40