MBS Live Recap: Range-Bound Volatility as Bonds Respond to Corporate Issuance

There are all kinds of bonds out there.  We follow the 10yr Treasury even though this is a mortgage-specific site for reasons outlined here.  Beyond Treasuries and MBS, there is also a fairly substantial market for corporate bonds.  That market is made slightly more relevant by the fact that corporate debt is typically priced based on a Treasury note index and traders consequently use Treasuries as a part of the corporate hedging process (i.e. protecting themselves against rate exposure from the time they know they'll be involved in the deal until the time the deal is 100% complete). 

The bigger the corporate deal, the longer and more important the hedging process becomes.  With that in mind, today saw the launch of the year's biggest corporate bond, by a wide margin.   Market were aware of it last week and that likely contributed to the weakness.  After it was launched today, bonds saw a bit of a reversal of that weakness, but if everything's happening the way it should, a well-telegraphed corporate bond is only ever a temporary market mover.  In other words, it accounted for volatility inside a range, but it is not a trend-setter in and of itself.

With that in mind, bonds effectively did nothing today, despite modest gains intact at the close.  And by doing nothing, they've failed to push back against recent weakness in a meaningful way.  We could hope that this is merely a bit of hesitation before tomorrow's congressional testimony from Fed Chair Powell, but it's hard to imagine how much clearer Powell is going to be compared to the press conference after the October 30th announcement.  Bottom line: bonds are still on the defensive--at risk of (further) confirming a new rising rate trend, but hoping to see some support kick in at the important 1.90-1.94% zone in 10yr Treasury yields.