MBS Live Day Ahead: As Expected, Bonds Take Higher Inflation in Stride

It's a sign of the times that the bond market responded with a modest rally following a stronger reading on CPI and a looming record-size 30yr bond auction this afternoon (not to mention stocks trading at all-time highs).  Granted, yields are now 100bps higher than they were in September, and much of that 100bps has been an effort to get ahead of more growth/inflation/bond supply.  The bigger questions surround the inflation/growth outlook several months down the road, as markets get an increasingly clear idea about what the post-covid economy looks like.

Despite a relatively smaller move in the big picture, a quick spike in volume lets us know that the market is, at the very least, tuned in to the big ticket inflation reports.  In fact, today's data garnered a bigger response than the early morning market mover of note: news of the suspension of the J&J vaccine.

This also allowed us to see both versions of the stock/bond correlation.  The first move (vaccine news) was exclusively "risk-off" for both sides of the market.  It's the sort of reaction that conventional wisdom would suggest (i.e. the kind we haven't seen too often in recent months).  The CPI reaction, on the other hand, saw stocks rise and yields fall (far more common recently).  The simplest way to think about that counterintuitive move is as an extension of the Fed accommodation trade.  In other words, if markets don't think a core CPI of 1.6 does much to accelerate a "taper"conversation from the Fed, it's good for both stocks and bonds.

As for the apparent discrepancy between MBS charts (which look weaker than yesterday) and the stronger prices (i.e. MBS are GREEN), that is a factor of the roll (learn more here).