MBS Live Morning: Bonds Waiting on Fed To Comment on Rate Hike Fears

By: Matthew Graham

One of the side effects of holiday-shortened weeks is a condensed data schedule.  That's especially true of Thanksgiving week as it essentially removes 2 days from the work week, even if the market is technically open for a half day on Friday.  Wednesday morning marked the week's biggest glut of data with the headliner being the PCE inflation data at 10am.  With PCE coming in as expected (4.1 vs 4.1 at the core level) and the rest of the data being relatively non-threatening for bonds, attention now shifts to the Fed's 2pm release of the minutes from the most recent policy meeting (3 weeks ago).  

The term "Fed Minutes" can cause confusion.  After all, it's a key policy headline from the Fed at 2pm on a Wednesday (just like the "Fed Announcement" 3 weeks ago).  The minutes, however, are simply a more detailed account of that meeting from 3 weeks ago.  They allow market participants to sort through clues about the Fed's thought process and arrive at conclusions that otherwise might not be obvious based on the smaller word count of the initial Fed announcement.  

In today's case, traders will be looking for evidence of broad-based willingness to increase the pace of tapering or to bring forward the rate hike timeline.  Just this morning, San Francisco Fed President Mary Daly addressed that topic in greater detail (coincidental timing, no?). Here are a few highlights.

Is the faster removal of Fed accommodation a legitimate threat in this day and age?  The market seems to think so based on Fed Funds Futures over the past few weeks.  The blue line corresponds with Fed Funds Rate expectations for the September 2022 meeting.  It's currently pricing in at least 2 hikes by then.  Moreover, the entire bond market has been tuned in to rate hike probabilities based on the correlation seen in 10yr yields.