MBS Day Ahead: As April Begins, Where do We Stand?

As the new quarter begins, let's pause to consider where we should be looking for bond market motivation.  What has been motivating rate movements so far in 2015 (and before, to be fair) and will that same motivation continue to be relevant? 

In order, the answers are "Fed policy" and "yes."

How can we be sure?  Let's start by taking a look at Fed Funds Futures.  These are financial instruments that allow investors to bet on the level of the Fed Funds rate in a certain future month.  Based on where those bets occur, probabilities can be derived for a rate hike.  Each month with a Fed meeting has its own Futures contract.  September is one of the most popular guesses for a rate hike and here's how it's been trading:

The takeaway here is that most of February and March's trading suggested at least a 50% chance of a rate hike by September.  Incidentally, most of February and March was awful for Bonds.  That finally changed with the March 18th FOMC Announcement, which you can see as the vertical line leading back to lower rate hike expectations in the chart above. 

So if the time frame when bonds were struggling coincides with ramped-up expectations for a Fed rate hike, how correlated might they be? 

"A lot," it turns out...  The following chart simply adds 10yr Treasury yields (inverted, so that higher yields are lower and lower yields are higher)

All that to say, it's fairly plain to see where we stand and what's important as the new quarter begins.  True, Europe continues keeping global bond markets relatively more depressed than they would be, but the Treasury-specific divergences have owed themselves mostly to the Fed policy outlook.

With that in mind, data matters going forward.  Not every report will have significant market moving potential, but of the more highly regarded reports, every release matters.  Today brings two of those, with ADP Employment at 8:15am and ISM Manufacturing at 10am.