MBS Live Morning: Does The Volume Matter? Oil? Fed Rate Hikes?

We typically don't talk too much about volume.  It doesn't much matter for the purpose of tracking intraday reprice risk because the price is the price is the price.  When we look beyond the intraday time frame, elevated volume can add validation to any particular move.  If the volume is seen as yields bounce at a floor or ceiling, we might consider that range more likely to be reinforced.  If it's seen as yields break past a technical barrier, we might take the breakout more seriously.  Unfortunately, the latter is the case today as 10yr yields jump to the highest levels in months in heavy volume.

All that having been said, assigning additional significance to movement that occurs in high volume isn't a terribly high probability analytical endeavor.  It might help us do a bit better than 50/50 when drawing any particular conclusion, but not much better.

The more interesting questions at the moment focus on WHY rates continue to move higher.  One of the most common questions we've seen recently is whether higher oil prices are impacting bonds.  To some extent, oil will always be a consideration for bonds as long as it's a key source of energy to move goods and people.  Based on those roles, it's a key input for inflation and inflation is a key consideration for bonds.  With this in mind, it's no surprise to see solid correlation over shorter time horizons.

Over longer time horizons, however, there can be big departures--especially when there's a bond-specific event or a big shock to currency valuations (as was the case in 2014 due to ECB QE).

It's also worth considering how much oil price movement needs to occur before one can reasonably argue it matters to bonds.  For instance, if we look at the percent change in oil prices vs bond prices, the chart looks quite different.

And it looks even more different over longer time horizons.  The following chart is the percent chance from the mid 1990's.

Perhaps one of the most noticeable correlations over the past few weeks is between rates and Fed rate hike expectations.  This is something we'll be talking more and more about between now and the first rate hike (which the market is now convinced it will see by the middle of 2022).