Fed Day Preview: What Are They Doing and How Much Will Bonds Care?
Given all the bond market volatility seen recently, the outlook for tomorrow's Fed announcement is surprisingly well understood by market participants. Both Fed speakers and Fed Fund Futures agree on a 50bp hike as a virtual certainty. We also know the Fed is highly likely to announce a start date for balance sheet normalization. They were even kind enough to lay out a normalization game plan in the meeting minutes released in early April. Most of the trading since then has been an effort to price in that game plan and it's no coincidence that yields are pushing long-term highs on the night before the big announcement. This doesn't mean markets can't trade as if they're surprised by the Fed tomorrow--only that the bar is fairly high for the Fed to do/say something truly unexpected.
Fed MBS Buying 10am, 11:30am, 1pm
Factory Orders 2.2 vs 1.1 f'cast, 0.1 prev (revised up from -0.5)
Closed in Asia due to Tokyo holiday, initially weaker in Europe, but then rallying back to unchanged in the long end (7s through 30s). MBS opening a few ticks lower, but still searching for liquidity.
Additional gains heading into the 9am hour, but possibly running into resistance as we enter the 10am hour. 10yr yields sideways, roughly 5bps lower at 2.928. MBS up an eighth of a point and also hitting some resistance.
No major shift in tone after the resistance seen earlier. It was a bigger factor for Treasuries, but they're still 4bps lower on the day (2yr is still slightly higher). 4.0 MBS coupons up 6 ticks (.19), near highs of day, but still sideways.
Noticeably weaker shift at 2pm and steadily weaker since then. 10yr now unchanged at 2.979 and 4.0 UMBS down 2 ticks (0.06).