Bigger Picture Bounce Becomes Bigger Risk, But Not The only Risk
Friday's strong jobs report certainly deserves some credit for increasing the risk that the Fed considers an earlier tapering timeline (as early as the September meeting if we see another similar report next time). But "another similar report" isn't a given. Ample uncertainty remains due to the current covid spike, and seasonally abnormal employment patterns being viewed through the lens of normal seasonal adjustments. Nonetheless, the downtick in the unemployment rate needs to be respected and we need to be ready to asses whether bonds are looking more interested in a sideways, "wait and see" approach next week or if today was just the first day of a bigger picture breakout.
Fed MBS Buying 10am, 1130am, 1pm
NFP 943k vs 870k f'cast, 938k prev
Unemployment 5.4 vs 5.7 f'cast, 5.9 prev
moderately and steadily weaker overnight in higher than normal volume. The move was very linear, without any major reactions to individual events, thus suggesting more pre-NFP position-squaring. 10yr yields up 2.5bps at 1.25% and MBS down almost an eighth of a point.
Post-NFP sell-off hit the supportive ceiling at 1.29 and has flatlined since then. Bonds could be consolidating for another move higher in yield, but have to wait and see. MBS holding steady 6 ticks lower (-.19).
Treasuries are still trying to hang on to the 1.29% ceiling (or close to it), but MBS have leaked lower. 2.0 coupons at new lows, down almost 3/8ths on the day and more than an eighth from rate sheet time.
Nothing that happens in the last hour will really matter in the bigger picture. Bonds effectively held sideways at the weakest levels of the day for the entire afternoon. MBS are down 3/8ths and 10yr yields are up 7.4bps at 1.299%.