MBS Live Recap: Surprisingly Big Impact From Econ Data

Bonds were losing ground clearly and convincingly this week, until this morning's economic data came along.  To be fair, we might say that bonds began holding their ground earlier in the week as the Treasury auction cycle began, with 10yr yields initially trying to hold under 2.42%, and generally succeeding in that endeavor through Thursday.

Today, then, was to be the day of decision--the first instance of meaningful economic data of the week--and without the burden of Treasury and corporate bond issuance.  Had the data come in stronger, I have no doubt that bonds were ready to break above the 2.42% ceiling, although I do think it would have needed to be decidedly strong.

Instead, the data was weak.  And while it wasn't exceptionally weak, it was weak in a way that poked holes in some of the narratives that have kept Fed rate hike expectations elevated.  Specifically, we're now dealing with year-over-year core CPI under 2.0% again--the first time we've seen that in a while and not as consistent with an urgent rate hike agenda at the Fed.  

Ultimately, bonds simply unwound all of the week's panic and weakness, with 10yr yields falling 6.7 bps to 2.326 and Fannie 3.5s gaining nearly half a point to 102-20.