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MBS Day Ahead: Bonds Just Hoping for an Orderly Escape; Bigger Decisions on Hold

September 19, 2019
by admin

In the day just passed, bonds trading was exceptionally calm in the wake of Wednesday’s Fed day. As I mentioned in the recap, it was one of the least volatile moves relative to expectations of any Fed day reaction I can remember. The consolidative vibes suggest either indecision or apathy, post-Fed. The clear takeaway from a strategy standpoint is that bonds really and truly are going to be heavily data-dependent in the coming weeks, barring some technical clue that gives away traders’ underlying predispositions.

In the day ahead, all we can do is keep an eye out for those technical clues and simply bide our time as the bond market does the same. The Fed will be more than willing to cut rates all the way to zero if the econ data justifies the move, but they aren’t going to do it just because they’re worried about a trade war and a global economic contraction. On the other side of the policy spectrum, it seems highly unlikely that the Fed will be hiking rates any time soon, but they would certainly be willing to do so if inflation began creeping or if the market was showing the ill effects of an overly-accommodative stance.

Bottom line, the recent story on 10yr yields is best told as a rejection of last week’s highs following by a hearty shrug of “I dunno” from bond traders. 1.91-1.94 would be the scariest danger zone to watch in terms of overhead ceilings. 1.80-1.84 (not highlighted) would be the warning track.

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In addition to domestic rate technicals, we’ll be following European monetary policy developments as the ECB played a much bigger role in the recent back-up and recovery than the Fed. There’s a realistic case to be made for September’s weakness being driven by ECB trepidation.

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