Bonds Obliterated by CPI Reaction and Fed Fear

If the bond market is forced to digest a surprisingly hot inflation report that goes a long way toward undoing much of the recent optimism surrounding a reversal in post-covid price pressures, we would always hope such things don't happen 3 days before a big Fed announcement with an updated dot plot.  But alas!  The dots cometh next Wednesday afternoon, and it's clear that market participants are hedging their bets for some significant migration toward higher forecasts in 2023.  That much is clear based on the staggering 24bp jump in 2yr yields.  10s escaped to the 3pm close with "only" 11bps of weakness.  MBS lost the better part of a point.  

Econ Data / Events

  • Fed MBS Buying 10am, 11:30am, 1pm

  • Monthly CPI:.......... 1.0 vs 0.7 f'cast, 0.3 prev
    Monthly CORE:....... 0.6 vs 0.5 f'cast, 0.6 prev
    Year over year CPI:. 8.6 vs 8.3 f'cast, 8.3 prev
    Year/Year CORE: .....6.0 vs 5.9 f'cast, 6.2 prev

  • Consumer Sentiment 50.2 vs 58.0 f'cast, 58.4 prev
    5yr inflation expectations jump big, highs since 2008

Market Movement Recap
08:57 AM

Initially much weaker after CPI, then a paradoxical bounce bringing 10s back to unchanged.  MBS are still much weaker due to yield curve flattening.  10s already giving up gains though.  Now up 1bp at 3.057.

10:10 AM

Paradoxical recovery didn't last long (now looks like brief short-covering).  10s hit new highs of 3.124 and still up 6.3bps at 3.109.  MBS down more than half a point.  Stocks tanking too.  All points to "Fed tightening trade."

01:35 PM

Bad times keep rollin.  MBS down more than a point at times, but now "only" 25 ticks (.78).  10yr yields are up 9.9bps at 3.144.  Stocks still kicking around lows of the day, down 2.5% in S&P futures.