This is Matt Graham with the MBS Live Market Update. Last week was an interesting one for the bond market with over the weekend news regarding the US China trade deal, sending yields higher to start the new week. At the end of the previous week, 10 year yield was trading just under 4.4 and then began the new week just over 4.46. Not the biggest move in the big picture, but a surprising jolt to start the new week. After that, things calmed down, but stayed mildly negative, lower than expected inflation via the CPI report on Tuesday morning. Didn’t do anything to help and that was generally the expectation because the impact of tariff changes has not yet worked its way into the hard data. The market was probably always going to discount that if it was a slightly lower number. But if it had been a higher number, it could have done some damage. That’s part of an asymmetric risk that we’ve been discussing over the past week when it comes to price related data. The following session was a little bit of a mystery move with yields continuing to drift higher, and no real fundamental market movers to blame for that. Some clues may have arrived the following day with the benefit of hindsight. Thursday morning we had a slew of economic reports and a speech from Fed Chair Powell in the economic data. The most relevant mover for the bond market was a weaker retail sales number when excluding some of the more volatile components. This is referred to as the control group in retail sales, and it excludes autos, gas and building supplies in this case, whereas retail sales itself was 0.1 versus a 0.0 forecast. The control group was negative 0.2 versus a positive 0.3 forecast, so a much bigger discrepancy there. And worth a little bit of a rally for bonds right outta the gate at 8:30 AM a short while later, Powell’s prepared remarks were released at an event that the Fed was hosting to get feedback on revising its inflation framework or its policy framework. This is something that last took place five years ago, and unfortunately, based on the lessons learned in the second half of the QE era of the great financial crisis response, the Fed concluded that it could adopt a symmetric inflation targeting approach, whereby if inflation had been running around 1.5% for X number of years, then the Fed could run it at 2.5% for an equal amount of time to offset. That previous episode of low inflation, thus creating a symmetry around 2%, that symmetric target did not serve the fed well at all in the post pandemic period. And they have reflected on that just as much as many of their critics have. And they will be scrapping that going forward and, the market generally assumed that, but hearing Powell confirm it in his speech was worth a little bit of extra bond buying on Thursday morning. We could also say perhaps traders were worried that Powell might have something to say that would’ve hurt bonds, and because he didn’t end up saying anything that hurt bonds. There were a quote unquote no whammies benefit there. Thursday’s Gains helped us get back almost to the levels seen at the end of the previous week and Friday ended up being very flat, right until the end of the day when Moody’s made the now famous announcement, at least famous for those tuned in to financial market news about a US credit rating downgrade and that seems like a bigger deal than it probably actually is, depending on one’s frame of reference. They are the third of the big three ratings agencies to make such a move. So in that sense, totally not unprecedented. The timing was a bit unfortunate in that there was only a 15 minutes left to trade that day, and that made for some spillover into the overnight session with Asia and Europe sort of dog piling into the same trade that pushed bond yields higher and stock prices lower. Now that we are into the 9:30 AM NYSE session, we’re seeing the US market push back against that overnight me momentum to some extent. The whole 10 year yields are only up less than two bits from where they were on Friday afternoon, which is a smaller sell off than a lot of people probably assumed we were going to see at the close of business on Friday heading into the rest of the week. It is very sparse in terms of big ticket economic data. Really the only relevant to economic report that has a tendency to move bonds would be s and p’s PMI index on Thursday. The services index is the more relevant of the two, generally speaking, but traders will definitely be looking at the price component of both of those for any early indications of how tariff impacted prices are evolving. Other than that, plenty of fed speeches we don’t expect they can really say much that hasn’t already been said by several other Fed speeches in the recent weeks. And then we have an early close on Friday and a three day weekend for Memorial Day. That’s gonna do it for this week. Back to you.
Matt Graham, Founder and CEO, MBS Live
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.