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). 

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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.