Hey everybody, Matt Graham with the MBS Live Market Update last week was hotly anticipated for the bond market with a big schedule of events including economic data, the Fed announcement and Treasury's quarterly refunding estimate and announcement, we started off with the ladder Treasury released estimate for funding needs for the upcoming quarter and that was generally well received. Not a huge surprise to the bond market, not a big reaction, but a modestly positive reaction that started the week off on a stronger note. Tuesday opposite effect came from the employment cost index, which rose at 1.2% in the first quarter versus a forecast of 1.0 ECI is a report that we didn't pay too much attention to for most of the past decade, but have increasingly paid attention to in the past few years as Powell and other fed speakers have mentioned its importance in policy considerations. With it coming in that much higher than expected. It's just another piece of evidence toward sticky inflation or persistent inflation along the same vein as the Q1 PCE data that came out the previous week but it didn't do any irreversible damage to bonds, it just sort of reiterated defensive position heading into Wednesday's fed events. There was other data on Wednesday morning itself that included the ADP jobs report and ISN manufacturing. None of those were bad for the bond market, and neither was the Treasury's official refunding announcement at 8:30am. All in all, the setup for the afternoon's fed announcement was fairly flat, but still near the higher yields of the past several months. The Fed announcement itself was very uneventful or very expected, you could say, the Fed acknowledged recently higher inflation and they also announced the start of QT tapering quantitative tightening tapering, that means they are going to shrink the balance sheet at a slower pace and eventually not at all. Some people have confused this with QE quantitative easing. Because from a functional standpoint, it does indeed amount to new bond buying on any given month from the Fed. But it is not something that is expanding the balance sheet or providing new easing to the economy. It’s net easing, and is best viewed as something that is less restrictive than it was before. But more importantly, it was very, very, very well telegraphed and widely understood to be a function of the drawdown of the overnight reverse repo facility, which has been shrinking rapidly, the Fed has said repeatedly when that near zero, they will start to taper QT in order to keep ample reserve balances and avoid a liquidity crunch like that seen in September 2019. So again, it's not QE, it is a slower pace of QT. Instead of only reinvesting the treasuries that exceed $60 billion a month, they'll now reinvest treasuries that exceed $25 billion a month in net proceeds, the market had been expecting 30 billion, so the extra five is perhaps worth a little bit of bond bullishness. But again, it is not new bond buying it is just less balance sheet roll off MBS incidentally, not affected, they weren't expected to be affected and as such, they didn't have any major negative reaction to that in terms of spread versus treasuries. The rest of the Fed events were limited to Powell’s press conference, and that was well received by the financial market for a few reasons. First, he essentially reiterated that the next move will be a cut and not a hike in all likelihood, yes, inflation has been problematic in the first quarter, but they still think it's going to fall into line. They're not afraid to cut rates before the election, even if that means they'll be labeled as political by some onlookers. They think that they've been clear enough in their ifs and dens that when and if the economic data suggests that it's time to cut, then they will cut. Only other thing Powell pushed back on the notion of stagflation in the market seemed to react to that particular comment in the moment to some extent, but all in all, not a super volatile fed day as far as fed days go. And we wouldn't really expect that given that they're very data dependent and we are waiting on the most important data, which will be May 15 CPI, but before then we had last Friday's jobs report, weaker than expected in a pretty straightforward way the bond market was willing to react in a moderate fashion And there was also some elements of correction to the previously oversold levels heading into the Fed. So the weak jobs report sort of created a nice miniature version of a perfect storm that was kicked off by Wednesday's fed announcement and helped the bond market. Correct from 10 year yields that we're getting up near 4.7 all the way down into the four point fours as of Friday afternoon. And now this morning, things are off to a decent start sideways and waiting for May 15. Because there's not much economic data on the calendar this week. Really just treasury auctions and those are best seen as creating choppy sideways volatility and not new directionality. New directionality will be CPI May 15. In all likelihood, that's gonna do it for this week. Back to you.
Matt began as an originator in 2002. He fell in love with the idea of following MBS in real-time but felt that existing products were only scratching the surface. Thus was born MBS Live in 2007, the first-of-its-kind platform with real-time market data/analysis, and live chat with analysts, traders, and originators around the country. He is currently the Founder and CEO of MBSLive!
He's been covering bond/mortgage markets, writing commentary, alerts, and chatting with the live community every business hour of every business day ever since.
Matt also serves as the Chief of Operations for mortgagenewsdaily.com, where he is one of the industry's most respected mortgage rate experts, frequently quoted in the media. Mortgage News Daily's rate index is used as the definitive resource on day-to-day mortgage rate averages.
He lives in the Pacific Northwest with his wife and son where he enjoys skiing, fishing, coaching youth sports, playing the guitar, and more DIY projects/hobbies than he'd care to admit.