MBS Live Recap: Bonds Rally Back to Range Lows With or Without Powell

Despite a fair amount of anticipation, today's Powell testimony proved to be a non-event for the bond market.  Instead, things like the weak Housing Starts data and strong Consumer Confidence got far more attention (as long as we're talking about attention in a relative sense).  Overall, today's trading range was very narrow in the bigger picture, and yields remained well inside the broader consolidation range that's been dominating 2019 so far.

Powell did manage to convey what we thought we heard him say several times recently: that the Fed has no real idea which way the economy is going to go, so watching data is very important as the Fed will react accordingly.  Ostensibly, this means they could cut rates later this year if things go south, but they could just as easily raise rates again if things heat back up.  What we don't know is exactly how either scenario would affect the balance sheet unwind plans.  

We'd hoped to learn more about the balance sheet plans today, but Powell played it close to the vest.  The risk is that the Fed ends up saying "if the economy improves enough, we could continue on autopilot with respect to balance sheet normalization."  That would run counter to last week's underlying theme which was that the Fed is very close to announcing an end to the balance sheet run-off.  As a reminder: "end of balance sheet runoff" = good for interest rates.

Bonds are punting to tomorrow and hoping to live another day without having to decide what to do about this pesky, narrow, sideways range.