The week begins with bonds adding to recent losses as yields move back toward the top of the prevailing sideways range. There are several ways to approach the losses over the past week, but all of them are supporting actors in the shadow of what will ultimately determine the bigger picture trend: inflation data. We’ll get the latest installment of CPI data by the end of the week. In the meantime, stronger overseas equities markets and a glut of corporate debt issuance are weighing on bonds.
Investment grade issuance had been very light heading into the end of May. That was one of the factors that paved the way for yields to explore the lower boundary of the current sideways range. Now as June trading ramps up, we’re seeing more and more issuers bring bonds to market. This morning has been the biggest day of the month so far. The ramp up in issuance coincides with overseas equities generally rebounding and EU bonds pushing up to new long-term high yields.
10yr yields are already breaking up and over the 3.01% ceiling, which had been a contender to offer support after yields definitively bounced at a floor of 2.72% at the end of May.
All of the above is spilling over to MBS in normal proportions with 4.0 coupons down just under half a point (the same level of weakness seen in Treasuries of comparable durations).