When we were pondering the possibility (or frankly, the likelihood) of core inflation above 3.0% a few months ago, there was no way of knowing exactly how the bond market would react. We got our first glimpse of the ultra-hot CPI numbers 2 weeks ago when bonds rose their fastest in more than 2 months, only to settle down at the end of the week. Today, another core inflation of over 3% showed an almost imperceptible reaction.
Translation: For now, bonds believe these spikes will be temporary. Before Covid, you would find it very difficult to convince anyone that the chart below could coexist with the closest trading day of the week to date.
In fact, it has been difficult for bonds to find greater motivation since successfully defending the 1.70% cap – an effort that began with the same CPI report two weeks ago. It was amplified the following week when returns failed to ignore the innocuous mention of taper talk in the Fed minutes (probably because it was harmless ?!). And while returns have actually gone down since then, A) this was really the only place they could have gone if they hadn’t broken the technical caps, and B) the best day of the rally seems perfect with the climax of the “calendar rolls.” “-Trade.
We rarely talk about this esoteric concept, but the calendar role is actually pretty simple. It involves traders placing positions in an expiring Treasury futures contract and carrying them over to the next quarter. In other words, the contract that everyone has been trading since late March (which will be settled in late June) has given way to the next contract (which will be settled in September).
As soon as trading in the September contract is ramped up (in this case at the end of May), the front contract is shut down at the same time. The quarter-to-quarter handover creates a flurry of buying and selling activity that can add to price volatility. Sometimes it helps. Sometimes it hurts. It helped this time … at first, but most of those gains came into the laundry yesterday. (Note: The chart below also includes German 10-year Bund yields, as part of the bond move higher at the end of May was driven by solid gains in EU bonds).
MBS Pricing Snapshot
The prices below are late. Please note the timestamp below. Real-time pricing is available through MBS Live.
103-18: + 0-02
|Prices from 05/28/21 10:04 a.m.|
Tomorrow’s economic calendar