How In The World Did Bonds Lose Ground After a Big Drop in Inflation?

This morning's hotly anticipated CPI data came in well below forecast--a turn of events that should have produced a nice little rally in the bond market.  Bonds did indeed rally initially, but began backtracking almost immediately (MBS managed to hold on to about a quarter point of improvement whereas  Treasuries turned red).  A paradoxical reversal to be sure!  Today's video is devoted almost entirely to discussing the rationale for such a move.  In short, it represented the same concern laid out in yesterday morning's AM commentary, but on an accelerated timeline.

Econ Data / Events
    • CPI m/m
      • 0.0 vs 0.2 f'cast, 1.3 prev
    • CPI y/y
      • 8.5 vs 8.7 f'cast, 9.1 prev
    • Core CPI m/m
      • 0.3 vs 0.5 f'cast, 0.7 prev
    • Core CPI y/y
      • 5.9 vs 6.4 f'cast, 5.9 prev
Market Movement Recap
08:35 AM

The "big turn" in inflation data is in--or so it would seem.  MBS up nearly 5/8ths and 10yr yields down 8.4bps at 2.693.  Stocks up 1.68%.  2yr yields down a whopping 17.3bps (more sensitive to the data's rate hike implications).

11:30 AM

Gains ebbing noticeably--especially in the longer end of the yield curve.  10yr down only 2bps now.  MBS still up 3/8ths, but down more than an eighth from the highs.

02:18 PM

Not much initial reaction to 10yr auction, but eventual weakness taking yields into negative territory in the 2pm hour.  10yr yo to 2.796.  MBS still up 19bps on the day at 99-28 (99.875).

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