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A Rough Day in the Bond Market: Insights and Expectations

Yesterday proved to be a challenging day in the bond market, driven by weaker auctions and stronger consumer confidence. These factors combined to create a less-than-ideal environment for bonds, resulting in a 15 basis point drop in mortgage-backed securities (MBS). Let's delve into the details and understand the rationale behind recent decisions and the market's trajectory.

Chart Analysis and Strategic Decisions

We closely monitored the bond market, especially hoping the 200-day moving average would hold. Unfortunately, it didn't, leading to worsening prices. In hindsight, issuing an alert might have been prudent, but here's the thought process behind the decision not to:

1. Locking in on Thursday: We secured positions before the long holiday weekend, reducing exposure.

2. Holiday Weekend: We anticipated minimal new activity due to the holiday, which informed our strategy to rely on the 200-day moving average as a support level.

3. Risk Assessment: Locking prematurely could have backfired if the 200-day moving average had held and prices had improved.

Despite these considerations, the market moved against us, breaking below the 200-day moving average and triggering further declines. This decision, though strategic, did not pan out as hoped.

Current Market Position

We're now dealing with a declining trend line and are close to a Fibonacci support level. Specifically:

- 10-Year Treasury: Struggling with its 25-day moving average, mirroring the MBS situation with its 200-day average.

- Supply and Demand Imbalance: Weak two-year and five-year bond auctions reflected high supply but low demand at current levels.

Economic Influences

Several key economic factors also played a role:

- Consumer Confidence: Jumped from 97 to 102, exceeding estimates and driven by the stock market's performance. This was a significant factor that bonds didn't favor.

- Inflation Expectations: Rose from 5.3% to 5.4%, the highest in some time.

- Job Market: Mixed signals, with a decline in the perception of job availability to its lowest since 2021.

Mortgage Market Update

The Mortgage Bankers Association (MBA) released data showing:

- Interest Rates: Relatively flat week-over-week.

- Purchases: Declined by 1%, down 10% year-over-year.

- Refinances: Fell 14% after previous strong weeks.

Despite these declines, refinances still constitute about 31% of overall transactions, indicating ongoing activity in this segment.

Upcoming Data and Market Outlook

Looking ahead, several key reports will influence the market:

- Core PCE (Personal Consumption Expenditures): Currently at 2.82%, with an expected slight decrease to 2.7%. This is closely watched by the Fed.

- Pending Home Sales and GDP Data: To be released soon, along with jobless claims.

- Seven-Year Note Auction: Scheduled for today at 1:00 PM Eastern.

With bonds sitting on key support levels, the current strategy is to float rather than lock in rates immediately. The upcoming PCE report on Friday is particularly significant, as it could sway market sentiment depending on its outcome.

We remain vigilant and will continue to provide updates as we navigate these market conditions. Stay tuned for further insights and strategic guidance as we approach critical economic releases.


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