MBS Live Recap: Some Reaction to NFP, But Just as Much to Harker and the Curve

Harker and the curve...  It's not  a song or a morning radio show.

It's a reference to the Fed's Patrick Harker commenting on the yield curve today as well as the possibility of slowing down rate hikes in order to keep arrows in the quiver in the event the tax bill results in some sort of economic overheating.  In that case, the Fed would like to have some more room to hike rates without bringing them up to levels that would guarantee yield curve inversion (i.e. 2yr yields higher than 10yr yields).  

Such inversions are thought to precede recessions (and indeed they've reliably done just that, although past precedent is never a guarantee for anything in financial markets).

The important takeaway from the Harker comments was for traders who'd been focusing on trading the yield curve.  It had just hit another post-crisis record low (or "tight") this morning, and the comments were taken as a cue to reverse that trade.  Reversing the trade meant selling 10yr Treasuries relative to 2yr Treasuries.  That's why rates rose heading into the noon hour.

Before that, the post-NFP trade merely resulted in back-and-forth volatility that left rates unchanged on the day--just another piece of evidence that markets aren't too terribly interested in trading economic data, even if they're willing to react to it over short time horizons.