Limited Data and Events; Limited Inspiration For Rallies
The current landscape is fairly simple. The bond market has been in the midst of a “repricing” event following the jobs report at the beginning of the month. Traders are “repricing” expectations for the Fed rate hike outlook. This has spilled over into longer-term rates. Until we have clear momentum heading in a friendly direction, the path of least resistance is for rates to continue redefining a new, higher range after failing to break through the new, lower range that was seen in December and January.
How do we know when we’re witnessing a capitulatory “repricing” event (not to be confused with mortgage lender reprices) for the broader bond market? We’ve posted charts on Fed Funds Futures over the past several days showing how longer term rate expectations have moved to match the peak/ceiling/terminal rates seen in the March/June Fed meetings. We’ve also clearly seen some abrupt selling in longer-term bonds and MBS. One thing that differentiates “repricing events” is the present of a slower grind that follows the bigger initial sell-offs.
This can be seen in the chart of this week’s movement in 10yr Treasury yields. Sure, we can break down some of the smaller moves inside the trend in the yellow lines, but most honest analysts will tell you that the general trend this week is NOT tied to the individual events that we connect to the small individual movements. Those same movements could result in a sideways trend or even a stronger trend in another market situation. In this case, the trading that surrounds those individual moves has been pervasively and mechanically weaker–as if the market were being guided by some robotic directive to make its way to higher yields in an orderly fashion.
Repricing events can be somewhat less orderly as well, especially when the revelations are bigger and/or more out of the blue. Some market participants would classify the Fed’s early 2022 tone shift as one of those less orderly events. Thankfully, the present repricing is more mild by comparison and should only continue to have serious legs if incoming economic data continues to justify concern over the inflation outlook or an overly hot labor market. Between now and whenever we get that data, all we can do is wait to see the point at which sellers have had their fill. This could happen at any moment–even today, but is only something we’ll be able to confirm after it’s already in progress.