MBS Live Morning: The Trend is Not Your Friend

Considering yields have pushed to new long-term highs on 3 out of the past 3 days, it's safe to say that bonds are "trending" as opposed to flat/sideways.  Covid cases are down sharply week-over-week.  Econ data continues to be decent enough.  And there are no signs that the Fed will forego a tapering announcement on November 3rd.  This trend is not your friend.  All we can do is stay defensive and wait for clear confirmation that bonds are turning a corner.  For now, we're lucky that yields haven't attempted to break up and out of the rising rate channel we've been tracking.

It's important, and potentially interesting to clarify what "rising rates" means.  The main point of distinction is between nominal yields and "real" yields (those that have been adjusted to factor out the inflation impact).  Markets actively price the inflation-adjusted yields via the TIPS market.  From there, we can look at the difference between TIPS yields and nominal yields to arrive at the proverbial "market-based inflation" (or "inflation impact" in the chart below).  This is one of the first places the Fed is looking for evidence of persistent inflation, and recently high readings are thought to have encouraged the Fed to taper sooner so that they are that much closer to being able to hike policy rates if the need arises in 2022.

Translation: real rates haven't been rising.  Instead, it is only inflation driving nominal rates higher.  The takeaway would be that if inflation fears begin to subside, rates won't have to remain on their currently troubling course (unless covid is precipitously defeated and the economy really takes off in an unexpected way).