Current Position: Floating Ahead of Tomorrow's CPI Report
Bonds went through their monthly coupon rollover last night. This occurs each month because Mortgage Bonds are finite. They have an end term, such as 30 years. Therefore, each month, a new 30-year period begins. This new 30-day extension is reflected in an adjusted rollover price. This rollover does not impact your pricing. The effect of yesterday's rollover was -14bp. Stocks and Mortgage Bonds are both higher to start the day. The focal point of today will be the 10- year Treasury Note Auction at 1:00 p.m. ET.
Tomorrow morning, the CPI (Consumer Price Index) inflation report for December will be released and is expected to show a drop in inflation, which would cause long-end yields, like Mortgage Bonds and the 10-year, to decline.
Will investors buy 10 - year Treasuries ahead of tomorrow's report to lock in higher yields and potentially gain capital appreciation now that inflation has turned the corner? They didn't the last two times there was an auction ahead of the CPI, but maybe they learned their lesson. If there is strong demand at the auction, it could add a boost to the Bond market this afternoon.
Tomorrow's December CPI Report
The December CPI report is expected to show headline inflation dropping from 7.1% to 6.5%, while the more important Core reading, which strips out food and energy prices and is the main focus of the Fed, is expected to drop from 6% to 5.7%. If we see Core CPI come in at 5.7% or possibly 5.6%, we will likely see a rally in the markets. If it comes in lower, but not as low as expected, it could be a rocky day.
The MBA released their Mortgage Application data for last week, showing that purchases were down 0.5% and are now down 44% year over year. Interestingly, the unadjusted index was up 47% from last week, showing you just how meaningful the seasonal adjustments are. Because they don't do a good job adjusting, the headline numbers may not be showing the true level of activity.
Interest rates decreased slightly from 6.58% to 6.42%, roughly 0.125%. Last year at this time, rates were roughly 3.5%, which means rates are around 2.875% higher today. Refinances rose 5% and are down 86% year over year.
Mortgage Bonds continue to trade somewhat sideways, with support at the 25 - day Moving Average continuing to hold. Bonds have a lot of room to the upside until reaching the next level of resistance at 101.671, roughly 40bp above present levels. The 10-year is trading at 3.57%, just below a triple ceiling of resistance that is keeping a lid on yields. If we get a Bond friendly CPI report tomorrow, yields could move 15bp lower to the next floor at 3.43%. Continue Carefully Floating ahead of tomorrow's CPI report.