I owe you an apology. I caused a bit of a sell-off in bond markets today. It all started yesterday afternoon when I called attention to the fact that Italian headlines and credit spreads were still moving markets even though they shouldn’t be. Markets didn’t like being pigeon-holed apparently and have taken the opportunity overnight to show that they don’t NEED Italy to set the tone.
Case in point, observe the teal line in today’s chart. Note that it had correlated almost perfectly with intraday movements in German and US 10yr action. Now today, there’s been a departure. A weakening in Italian credit spreads is no longer helping core bond markets.
What gives?! For all intents and purposes, this is the markets warning shot regarding next week’s central bank announcements. In today’s case specifically, it has been the European Central Bank (ECB) whose speakers have caused a bit of bond-bearish concern overnight. Here are some highlights:
ECB’S PRAET SAYS INFLATION EXPECTATIONS ARE INCREASINGLY CONSISTENT WITH OUR AIM
ECB’S PRAET SAYS ANY DECISION CONCERNING THE TERMINATION OR FURTHER EXTENSION OF OUR NET PURCHASES WILL HINGE ON THE ULTIMATE JUDGEMENT OF THE GOVERNING COUNCIL.
ECB’S PRAET SAYS THERE IS GROWING EVIDENCE THAT LABOUR MARKET TIGHTNESS IS TRANSLATING INTO A STRONGER PICK-UP IN WAGE GROWTH.
ECB’S PRAET SAYS MARKETS ARE EXPECTING END OF ASSET PURCHASE PROGRAMME AT END OF 2018 – THAT’S AN OBSERVATION AND INPUT FOR DISCUSSION
ECB’S WEIDMANN SAYS MARKETS EXPECT END OF ASSET PURCHASE PROGRAMME BY END OF YEAR, THESE EXPECTATIONS ARE PLAUSIBLE
Of particular note is the fact that we have 2 separate speakers both referencing the market’s expectation for the end ECB QE in 2018, followed by some iteration of “giving the market what it’s expecting so as to not cause undue volatility and also to take the opportunities to tighten policy when those opportunities present themselves” (this is a distillation of other comments from the two speakers above).
In any event, that was the takeaway for bond markets, and that was the reason we see German Bunds rising to even higher yields than yesterday morning despite the Italian drama quotient suggesting a rally. US traders are content to take cues from Europe amid a dearth of actionable data. Moreover, we know European policy tightening (or lack thereof) has been a big part of the equation for the Fed’s pace of policy tightening. Bottom line, these comments have caused a bit of a ramp in apprehension over next week’s policy announcements (Fed on Wed and ECB on Thu).
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
101-22 : -0-04
2.9570 : +0.0380
|Pricing as of 6/6/18 9:51AMEST|
Tomorrow’s Economic Calendar