Modest Gains, But Huge Moves in Rate Sheets

By the end of the week, the power of MBS coupon stack compression combined with healthy bond gains to deliver some of the biggest rate sheet improvements of the past several decades.  Bonds started the day in weaker shape, but turned a corner after the morning data.  Hotter PCE inflation and ECI was "tolerated" and "digested," but tremendously weak Chicago PMI got the ball rolling toward positive territory.  Month-end positioning took over and was exacerbated by short-covering.  There was a brief bounce after the official month-end closing bell, but not enough to undo what had been done.  

Econ Data / Events
    • Overall PCE Price Index
      • m/m: 1.0 v 0.6 prev
      • y/y: 6.8 vs 6.3 prev
    • Core PCE Price Index
      • m/m: 0.6 vs 0.5 f'cast, 0.3 prev
      • y/y: 4.8 vs 4.7 f'cast, 4.7 prev
    • Employment Cost Index
      • 1.3 vs 1.2 f'cast, 1.4 prev
    • Chicago PMI
      • 52.1 vs 55.0 f'cast, 56.0 prev
Market Movement Recap
08:42 AM

Initial knee-jerk pullback after 830am inflation data, but bonds now at better levels than before the data (though still a bit weaker from the overnight session).  10yr up 3bps at 2.7.  MBS down about an eighth, but illiquidity is distorting reality.

11:30 AM

Additional gains heading into the end of the EU session (not necessarily EU-driven, but when Europe closes, momentum could nonetheless shift).  10yr now DOWN 2.7bps at 2.645 and MBS up 6 ticks (.19).

01:56 PM

More gains for MBS.  Best levels of the day with 4.0 coupons up nearly a quarter point.  10yr not quite at best levels, but close--down 4bps at 2.632.

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