Bonds traded an almost perfectly straight, gradually-sloped line toward higher yields overnight and were even able to mostly ignore moderate volatility in European markets (much more so than normal). We knew today’s AM data would play some sort of supporting role in shaping the outlook for next week’s Fed meeting and it has not disappointed in that regard. Unfortunately, that role is incredibly dynamic given the multitude of mixed messages. Paradoxically, traders’ takeaways seem to be to modestly downgrade next week’s rate hike odds while modestly upgrading their view of the Fed Funds rate in 9 months.
In the bigger picture, today does nothing to change the prevailing uptrend in rates, nor the persistent oversold technicals.
On a separate, but far more interesting note, here’s one quick example of just how crazy the temporary illiquidity can get in MBS. The following chart is bid vs ask prices on 4.5 UMBS with the spread between the two at the bottom. Needless to say, none of those prices are actually indicative of where trading is occurring. In fact, I couldn’t even tell you what is behind this weirdness with certainty, but the fact that the spread only ever changed by exactly .172 (those bounces were .172 to .344) suggests it was the result of some computational error in an automated market-making process. This isn’t important to understand. I just wanted to highlight how wildly different the bid vs ask price can be at times, and how illogically the bid can be moving.