MBS Live Recap: Bonds Almost Perfectly Unchanged in Q1

Month/Quarter-end bond buying was nowhere to be seen until today.  It can provide a mild but determined positive trend in bond markets that transcends economic data.  Case in point, Core PCE was +1.8 vs a +1.7 forecast today and bonds began losing ground immediately following the data.  Less than half an hour later, the weakness abated and both Treasuries and MBS embarked on a slow, steady journey into moderately positive territory.

Before the positivity kicked in, it looked like there was a decent chance that Q1-2017 would end at exactly the same levels as Q4 2016 (just over 2.43%).   Even then, it would be fair to characterize Q1 as "almost perfectly unchanged" for longer-duration bond markets.  

The "longer-duration" distinction is important because shorter-duration bonds (like 2yr Treasuries) didn't fare as well.  That can be seen in the following chart of 10yr yields and the 2s/10s spread (10yr yield minus 2yr yield).  The lower the red line, the closer together 2 and 10yr yields are.  The discrepancy makes sense considering 2yr yields are more affected by the Fed's short-term rate hike outlook.

What does this all mean?  Nothing specific!  It's just interesting to note how flat we've been.  Such extended periods of flatness can either act as "pauses" in a longer-term trend (i.e. just taking a break before rates continue higher) or supportive ceilings that suggest bonds have found the limit of their weakness for now.  We won't know which until the historically narrow range of the past 5 months is broken.