Big Swoon After Fed Announcement, Big Recovery Later
Today delivered on the typical Fed day promise of big market movement and high knee-jerk potential. Bonds were only modestly weaker and very flat before the Fed, but yields surged quickly higher after the announcement. The Fed explicitly stated that balance sheet normalization was happening at “a coming meeting.” Pretty vague, but still… More importantly, the dot plot laid bare the extent to which the rising rate outlook is entrenched. As Powell spoke at the press conference, markets calmed down and returned toward previous levels. Ultimately, the bounce back makes much more sense than the knee-jerk weakness because all the Fed really did was to confirm what we already knew. The surprise may have been that Ukraine was viewed as another reason to be hawkish as opposed to cautious.
Econ Data / Events
Fed MBS Buying 10am, 11:30am, 1pm
Retail Sales 0.3 vs 0.4 f’cast, 4.9 prev Import Prices 1.4 vs 1.5 f’cast, 1.9 prev NAHB Builder Confidence 79 vs 81 f’cast, 81 prev
Market Movement Recap
09:24 AM Moderately weaker overnight with some additional selling after the AM econ data (but not necessarily because of it). “Pre-fed jitters” = easy, boring justification that’s hard to disprove. “Ukraine peace talks” are in the news again, but we still don’t love that justification. 10yr recovering a bit now, up only 1.4bps at 2.163 and 3.5 UMBS down 7 ticks (.22) at 100-27 (100.85).
10:29 AM Algo trades seized on a mini-glut of Russia/Ukraine newswires with an FT article talking about a ceasefire draft and Putin yet again saying things about being “ready for diplomacy.” Quick move to weakest levels for bonds (stocks higher, oil prices lower). Classic Ukraine de-escalation pattern, but fairly small in the bigger picture.
01:24 PM Treading water at slightly weaker levels ahead of Fed. 10yr up 2.3bps at 2.174 and MBS down 6 ticks (.19) in 3.5 coupons.
02:36 PM Big sell-off after Fed announcement, mostly due to the drastic ramp in the dots, but also with an eye on the inclusion of a (somewhat) specific threat about balance sheet normalization. Slight bounce for long end of yield curve, but MBS still down half a point.
03:27 PM Nice little recovery as Powell press conference progressed. Most of the gains were in the long end of the yield curve. MBS underperformed but are still more than a quarter point off the lows (-3/8ths day over day). 10yr is up only 4bps at 2.188 and MBS down only 3/8ths (vs 5/8ths earlier).