Weak Data Continues Driving Paradoxical Moves in Bonds

The Day Ahead       Matt Graham | 12/10/2020 10:06 AM

One interesting theme that’s emerging in December is that of weaker economic data actually hurting the bond market.  This is certainly not in the conventional wisdom playbook, but it’s actually easy to explain in this case.  The theory is that when politicians are confronted with timely, big-ticket reports showing troublingly weak employment data, they are incrementally more likely to compromise on a fiscal stimulus package.  Unlike monetary support, fiscal stimulus is bad for bonds.  If it happens before next Wednesday, it also decreases the odds that the Fed will make rate-friendly tweaks to its bond buying portfolio.  The net effect is bond market weakness in response to weak economic data.

Case in point, 10yr yields rose this morning following weaker Jobless Claims data.

Thankfully, that’s not the only game in town though.  Data and stimulus aside, traders have increasingly been comfortable supporting a 10yr ceiling just unde 1.0%.  At the same time, yields have not been eager (at all) to make a strong move back toward lower levels.  The takeaway is that we’re waiting to see what stimulus looks like when and if it comes, and what the impact (if any) will be on the Fed’s decision-making process next week.

Beyond that, the connection between Treasuries, MBS, and Mortgage Rates remains in a state of unpredictable flux.  One warning though: spreads are starting to tighten.  Lender margins are starting to thin.  The clock is ticking on mortgage rates being immune from bond market volatility.

Economic Calendar
Forecast Prior
Thursday, Dec 10
8:30AM  –  Nov Consumer Price Index (CPI) (%)
  0.1 0.0
8:30AM  –  Nov Core CPI (Annual) (%)
  1.6 1.6
8:30AM  –  w/e Jobless Claims (k)
  725 712
1:00PM  –  30-Yr Bond Auction (bl)
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  • Calculated Risk Blog – 9:08AM

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  • CNBC – 8:05AM

ECB expands its bond-buying program as coronavirus resurgence weighs on the economic recovery

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  • Mortgage News Daily – 5:40PM

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