Bonds Doing Admirable Job of Digesting Harsh New Reality

Yesterday's comments from Fed Vice Chair Brainard effectively prepped the bond market to receive some bad news today.  Trader's correctly guessed that Brainard's hawkish talk on balance sheet normalization spoke to the probability of sterner stuff in today's Fed Minutes release.  To wit, the Fed's thumbnail sketch for balance sheet shrinkage would involve slowing MBS purchases to all but a trickle as early as next month.  Granted, the Fed doesn't know what the total amount of reinvestments will be for future months so it sets a limit for the amount of portfolio proceeds it will receive before reinvesting any overage.  The amount in the Fed Minutes?  $35 billion.  The amount of actual reinvestments in this cycle?  $38 billion.  In other words, this normalization plan would have have seen the Fed buy $3 bln this month instead of $38 bln. 

Econ Data / Events
Market Movement Recap
09:51 AM

Sharply weaker overnight as global markets add on to the pre-Fed-Minutes fear trade.  10yr up 6bps at 2.614, but well off highs of 2.66.  MBS down only a third of a point after being a half point lower earlier this morning.  

12:44 PM

Decent bounce back in bonds, led by the short end of the yield curve.  MBS are outperforming 10yr Treasuries as a result, currently just shy of unchanged levels and roughly half a point off the lows.  10s are up 4.3bps still at 2.598.

02:47 PM

Initially stronger and now slightly weaker after FOMC Minutes.  10yr up 6.4bps to 2.62 and MBS down 6 ticks (.19) to 100-27 (100.84).

04:15 PM

Bonds back to best levels (MBS anyway) with 4.0 coupons UP 1 tick (0.03) on the day.  10yr yields up 3.8bps to 2.592.  Markets just digesting Fed minutes and cleaning up positions in light post-CME-close liquidity.