If anything, fighting intensified over the weekend in Ukraine.  This is something that would typically drive more safe-haven buying in the bond market, but one counterpoint is that the bond market priced in the biggest risks by the beginning of last week.  The other counterpoint is that both Zelenksy and one of his representatives mentioned a positive shift in peace talks over the weekend despite ongoing attacks.  That’s a big pill to swallow, so let’s focus on the beginning of last week.  It served as a turning point for bonds due to inflation implications surrounding the war.
Until then, bonds still showed the ability to rally when the news in Ukraine was bad.  There was as strong inverse correlation in February with rising oil prices coinciding with falling bond yields as investors sought insulation against Ukraine-related risks.  In the first week of March, oil continued higher while bonds focused on Fed Chair Powell’s congressional testimony.  As fighting intensified last weekend, bonds and oil prices hit their most extreme levels of the war (high oil prices and low bond yields).
Oil managed to obliterate the previous week’s ceiling, but bonds barely made it to lower yields.  This was the first sign that the “no win” situation that we warned about was playing out (at the time, MBS were almost 2 points higher and 10yr yields were more than 30bps lower than they are today).  The simplest way to reconcile today’s weakness is actually NOT by leaning on “peace talk” headlines, because let’s be honest… will anyone really believe that Russia will just pack up and go home until they actually witness such a thing happening?  
Rather, the trend is the trend as far as bond yields are concerned ever since the wake-up call at the beginning of last week.  The nastiest part of this analysis is that even if you want to believe that peace talks are moving markets, that’s bad for bonds too.  If you don’t, then there’s already been enough of a spike in commodities’ prices to send inflation shockwaves that are big enough to keep upward pressure on yields, even if oil prices fall.  

Published On: March 14, 2022 / Categories: Mortgage News /