Bonds are off to stronger start for a 4th straight trading session. As such, they're following the same pattern as the rally attempt 2 weeks ago (which ultimately failed), but there's certainly a bigger sense of urgency behind this week's version. Are bonds still consolidating ahead of the Fed or does the extra momentum suggest a bigger-picture corner has been turned?
Here's a decent way to think of the current trends:
- Rates definitely needed to correct to higher levels in response to the Fed's policy shift in early January
- It was (and still is) logical to see that correction occur with surges and corrections (2 steps up, 1 down, etc.)
- It was (and still is) logical to see yields break above previous post-covid highs, but it's immensely logical for short-to-mid term yields and a bit of a moving target for 10yr+
- Curve flattening, geopolitical risks, and a big stock sell-off are combining to help the most recent consolidation gain a bit more ground than the previous attempt
- Long story short, 10yr yields over 1.80% were perhaps just a bit too hot for this stage of the great Fed policy reprice of 2022
- The "it's just a consolidation" thesis will be strongly confirmed if yields struggle to break into the "too cold" territory below 1.70%.
- IF yields DO break below 1.70% and hold it both before and after this week's auction cycle and Fed announcement, it would be an exceptionally strong endorsement of the 1.80-2.00% range as a supportive zone going forward (but keep in mind that pivot points don't predict the future. They just help us sort out which moves are significant).
In other news, MBS continue their gradual, ongoing trend of underperformance (i.e. MBS are rallying tepidly this morning whereas Treasuries are rallying fairly well). This is to-be-expected with the Fed buying fewer and fewer bonds each month.