MBS Day Ahead: Is the Recent Weakness About Next Week's Fed Expectations?

Yesterday's mid-day commentary did a good job of summing up the general malaise in bond markets.  Revisit it HERE if you like, but here's the important part:

We're left to sort through a laundry list of potentially inconsequential factors in order to assess the severity of the ongoing weakness.   None of the morning's data or events can be clearly connected to any of the market movement.  Impending Treasury auctions are one consideration, but so is the sort of generalized selling pressure we see when a rally has run its course.  Unfortunately, unless 10yr yields were to break over 2.55, this weaker trend could simply be a correction inside the longer-term trend of 2014.nfortunately, unless 10yr yields were to break over 2.55, this weaker trend could simply be a correction inside the longer-term trend of 2014.

The reason this is worth revisiting is that speculation has picked up that the weakness has to do with expectations for next week's Fed announcement.  The thought is that the Fed could change the language in the announcement to drop the "considerable time" assertion on the low rate pledge (i.e. rates would stay low for a considerable time after asset purchases end). 

To be sure, this is a very real possibility, and the 'Fedspectations' definitely deserve a place in the aforementioned laundry list.  But the problem with it is that the proponents of the notion point to a paper recently published by 2 Fed economists on the public potentially misconstruing Fed guidance.  The only problem with the theory is that the paper came out on Monday while bond markets have clearly been selling off since last Tuesday.

The point is that market participants are reaching to make some sense of what's going on right now.  Sometimes things just aren't that black and white, and that's OK.  At least as far as the theory that Treasury Auction concessions  are causing weakness is concerned, we'll get a major update today with the 10yr Auction at 1pm.  Data is slim apart from that, so the watching and waiting continues.  We're still in a weaker trend until we're not.