The positive close on a volatile Fed day offered false hope for rates–a fact that was laid bare with Thursday’s massive sell-off. Now on Friday, more false hope as another massive overnight sell-off gave way to a full recovery by 9:20am. Since then, however, it’s been all sellers.
In other words, bond tanked again. But questions remain as to WHY.
It’s not that we don’t understand the market is in the midst of repricing the Fed rate hike outlook based on this week’s dot plot, but that alone doesn’t seem to justify the pain we’ve seen. In searching for other scapegoats, some British explanations gained traction yesterday as the Bank of England (BOE) announced asset sales. That remained debatable as of yesterday afternoon although the outsized move in UK bond markets raised eyebrows.
Now today we have more UK influence and this time it’s obvious. Unfortunately, it’s also a bit weird and esoteric. It has to do with a “mini budget” announced by the UK’s finance minister. You don’t really need to know what that means apart from the fact that it greatly impacts the supply/demand equation for UK bonds–especially in light of yesterday’s confirmation of bond sales from the BOE. In other words, it’s kind of a double whammy for UK rates, and UK rates often give guidance to US rates.
The following chart is rather striking in this regard. Keeping in mind that the Fed announcement happened on 9/21, you’d be forgiven for thinking that US rates might not have moved much higher after the Fed had it not been for the UK influence. You might even be mostly right.
The unfortunate development for mortgage rates is that the shorter end of the US yield curve is still definitely in the midst of repricing the Fed rate hike outlook, and the short end has more of a bearing on MBS. As such, MBS are still well into negative territory even as the 10yr turns green.