MBS Live Day Ahead: Rising Rate Expectations + Falling 10yr Yields

In the day just passed, bonds didn't move a ton in the bigger picture but endured an hour of whipsaw volatility surrounding the Fed announcement and press conference.  The market deserves some blame for relentlessly hoping to pin down Fed Chair Powell on some assurance about the future path of rates.  And while Powell doesn't know what the future holds, he also deserves some blame for not simply explaining that in more candid terms.  In other words, he tried to give an answer to each question as opposed to saying "I don't know."  

In the day ahead, bonds will reflect on yesterday's implications as they digest the 2nd most important economic report of the week, ISM Manufacturing at 10am.  Yesterday's implications were different for different parts of the yield curve.  That's the reason we saw Fed rate expectations move higher despite 10yr yields finishing lower on the day.

In other words, rates are arranged in a spectrum of duration.  The things that affect the shortest term rates are sometimes similar and sometimes different than that which affects longer term rates.  Yesterday was a modest wake up call for those expecting overly-aggressive Fed rate cuts, so shorter-term rates suffered relative to longer term rates.  The shorter the duration, the greater the suffering (i.e. Fed Funds Futures are the shortest-term indication).  

Bottom line: the market may not see rate cuts being as certain as they did 2 days ago, but 10yr yields are operating on a slightly different agenda.  Economic data heavily informs that agenda.  We'll see how much at 10am and especially after tomorrow's NFP.