MBS Live Day Ahead: Bonds in Rough Shape as FOMC Minutes Approach

Today brings the release of the MINUTES from the most recent FOMC meeting.  This is distinct event from the ANNOUNCEMENT that happened about 3 weeks ago.  The minutes simply provide a more detailed account of the meeting that took place 3 weeks ago.  There is no rate hike on the table today and no policy change that could be announced (again, they're not even meeting today--just pushing a button that makes meeting minutes appear on their website).  

The minutes are nonetheless valuable to market participants as they can foreshadow impending rate moves.  In today's case, markets are widely expecting to see additional confirmation that the Fed is moving toward a rate hike by December (the month that used to seem like a long way away, until it suddenly became October!).

Those expectations are likely behind some of the recent weakness in bond markets, but it's important to know that they have not been the key driver of weakness.  In other words, if the minutes are less alarming than expected, there won't be some big rally that magically brings rates back to last week's levels.  

It's also important to know that, despite the consistency of recent selling pressure, there's more room to run in terms of bond market selling.  We've only just now broken above the important pivot point around 1.75% in 10yr yields, and there's a risk it could now become a floor.  Because of this, we shouldn't get too excited about a rally today or tomorrow if it merely returns yields to 1.75%-ish.  I'd want to see a break back below before entertaining the idea of short-term optimism.