MBS Live Recap: Bonds Protesting Their Short-Term Death Sentence

It's not incredibly common for bonds to improve in the week leading up to an almost certain Fed hike.  That said, we only have 2 recent examples in the modern economic environment.  So there's not really an established trend that dictates how bonds should behave in these circumstances.  

In fact, "all things being equal," the trend would be pretty neutral from here, heading into next week's Fed announcement, and that it WOULD have been pretty neutral today.  

But all things aren't equal.  

This week added quite a bit of "supply" to the bond market.  Most of it was expected, but a fair amount was not.  The unexpected supply comes in the form of corporate debt issuance that was either not yet on the radar or that simply came in at larger-than-expected values.  The added corporate issuance compounds preexisting apprehension about a Treasury auction cycle in the week before a nearly certain Fed rate hike.

Again, there's no script for that, but if the average trader had to take a stand, it wouldn't likely be in the "buy more bonds" camp.  All things considered, the fact that 10yr yields are only 2.4bps higher on the day is pretty good.  We digested a lot of corporate supply and there is a fair amount of risk in the near-term calendar.  It's uncomfortable to be approaching that risk from 2.52% (a fairly important upper-level pivot point in the 10yr yield range), but that's better than approaching it in the throes of a preemptive "lead-off" toward even higher rates.