MBS Live Recap: Fed Minutes or Same Old Trend. Either Way, Bonds Didn't Like It

The Fed released the minutes from its late January meeting today.  Markets thought about them for 20 minutes and then tanked.  What's up with that?!

Looking at rate volatility as a factor of Fed policy can be tricky business.  On the one hand, it would be easy to argue that the Fed has more power than anything else to affect the trajectory of interest rates.  On the other hand, it could easily be argued that the Fed is merely responding to prevailing economic and financial conditions to the best of its ability and that appearance of the Fed's outsized impact on rates has more to do with a mismatch between the market's expectations and the Fed's thinking. 

With all of the above in mind, the meeting minutes provide market participants with a much clearer look inside the Fed's collective mind as it existed at the policy meeting 3 weeks ago.  Their thought process was generally in line with our current understanding of economic conditions.  The only hitch is that our understanding has been informed by some stronger economic data over the past 3 weeks, including a hotter read on inflation and wage growth.  As such, financial markets figured the Fed might be even more eager to hike rates in light of the past 3 weeks.

There are some theories out there that argue it took markets 20 minutes to realize the Fed meeting happened before the last NFP reading or the stronger CPI report and thus would have been even more hawkish than it already was.  This "sudden realization" explanation isn't quite as crazy as it sounds at first glance.  Markets are often waiting to see if a bandwagon will show up after a key event and which way it will be traveling.  It could indeed be the case that 2:20pm ET was bandwagon time today. 

That said, it could also be the case that bonds immediately begin making "steepener" trades (which refers to a steeper yield curve, aka a wider gap between short and long-term yields) in the wake of the Minutes, but those trades didn't have a big effect on 10yr yields until 2yr yields finally bounced and moved higher (because falling 2yr yields would allow a steepener trade to coincide with flat 10yr yields).  Indeed it was when 2yr yields bounced that 10's and the rest of the bond market really took off.  That's because the yield curve is big business for traders these days, and if you have a steepening curve and rising 2yr yields, 10s are about to spike.

Stocks tanked and pundits blamed the spike in bond yields.  Give me a break!  How is it, then, that the S&P surged more than 80 points the last time 10yr yields spiked up and over 2.90%?  This was just last Wednesday!  Don't drink the Kool-Aid.  Stocks tanked for the same reason bonds sold.  Markets were worried about a hawkish Fed and the Fed was hawkish.  And so the same old trend toward higher rates presses on.