MBS MID-DAY: Luck Runs Out for Bonds, but MBS Outperform

Today has been all about yield curve steepening.  That means that longer-lasting bonds have been doing worse than shorter term bonds.  For instance, 10yr yields are up 6.4bps while 2yr yields are up only 0.8bps. 

There was one clear source of motivation for the steepening of the yield curve.  Just after 4am, Fed Vice Chair Fischer said that economy was nearly at full employment despite a lack of inflation.  He went on to frame the lack of inflation with low oil and raw material prices, saying, "These are things which will stabilize at some point."

The implication is not all that different from what several Fed speakers have suggested.  To paraphrase, "yeah, we know inflation is low, and it will continue to be low until it's not anymore, but if energy/materials prices are bottoming out, then we're pretty sure inflation will pick back up shortly thereafter."

Despite the fact that markets are no unfamiliar with this rhetoric, the trading reaction was fairly swift, but again, it was easiest to see in the yield curve as opposed to individual yield levels.

The MBS coupons that affect rate sheets aren't quite as long-lasting as 10yr Treasuries, on average.  Because longer-lasting bonds are doing worse today, MBS are doing better, relatively.