MBS Live Recap: Expected Amount of Volatility But Not For Expected Reasons

Heading into this week, we looked to today as the biggest potential source of volatility owing to the release of the Consumer Price Index (CPI) and the end of the Treasury auction cycle.  The volatility definitely showed up, but those two factors were at the bottom of the list of today's market movers.

CPI was mostly ruled out as a market mover after Fed Chair Powell talked about inflation on Tuesday.  I talked more about why that was the case in the Day Ahead.  Deceptively, yields started spiking a few minutes after CPI.  Was I wrong to downplay its significance?  I definitely thought so for a moment, even though it wasn't logical, but looking at other markets it was easy to see the move originated in Europe (as discussed in THIS update).  Europe would continue to have an impact through the AM hours as Brexit hopes ticked up on reports of compromise in a meeting between Boris Johnson and Irish PM Varadkar.

Trade-related updates pushed stocks higher and that surge generally coincided with higher bond yields.  While that's a typical sort of correlation, the damage for bonds was already halfway done before stocks had their say.  The rest of the morning hours were spent drifting slightly higher in yield.  Treasury losses were capped out when Europe closed and yields never made it back above those levels.  All of the above having been said, there were indeed isolated instances of stock/bond correlation in response to trade-related updates.  They just didn't dominate the day for the bond market.

Tomorrow will be interesting.  It's the day before a 3-day weekend and there is certainly headline potential due to the ongoing US/China trade negotiations.  From a technical standpoint, there's a risk that bonds have bounced at recent lows and are heading back to the upper end of a longer-term consolidation pattern (as seen in the MBS Huddle).