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MBS Highway - Daily Updates 11/10/2022

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Current position: Continue Floating

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 -17bp.

Stocks and Bonds are both flying higher after a much cooler-than-expected inflation report... which we have been anticipating for several months based on our inflation modeling and that we have shared with you many, many times. The Bond market needed this sigh of relief!

Inflation Data

The October Consumer Price Index (CPI) report showed that overall inflation increased by 0.4%, which was 0.2% below expectations. Year over year, inflation declined from 8.2% to 7.7%, which was much cooler than the 8% expected.

The real story here is the Core rate, which strips out food and energy prices. It increased by 0.3%, which was softer than the 0.5% anticipated. As a result, year-over-year core inflation decreased from 6.6% to 6.3%, which was also much lower than the 6.5% expected.

Shelter rose by 0.8%, which is the largest monthly increase in the history of the index and is up 6.9% year over year. Rents rose 0.7% last month and are now up 7.7% year over year, which is up from 7.2%. Owner's equivalent rent, which tries to capture the rise in home prices but does a poor job, rose 0.6% and is up 6.9% year over year, up from 6.7%. While the CPI rental costs are still catching up, real rental costs have started to come off their peak and slightly decline. Because shelter makes up 39% of Core CPI, it was the main cause of the 0.3% monthly gain... but imagine when this catches up to what is the softening happening in the real shelter market.

Looking at more of the internals - Energy prices rose 1.8% from a month ago, bringing the annual gain to 17.6%. Gasoline prices rose 4 % and are up 17.5% year over year.

Food prices, which make up 14% of the CPI, climbed 0.6% in October, bringing the year-over-year gain to 10.9%. Medical care costs were the main factor too as they fell 0.6% last month and 5.4% year over year.

The New York Fed's underlying inflation gauge has declined for four months in a row as of October and, at 4.4%, it is now at the low for the year. This index includes CPI components but also factors in a wide range of nominal, real, and financial variables.


Yesterday's 10 - year auction went off at the highest yield in recent memory, but it was met with extremely weak demand. Not only was domestic participation weak, but there was also very little foreign participation. The Bond market initially sold off sharply but was able to weather the storm and claw back the losses. Today's 30 - year Bond Auction will be at 1:00 pm ET and can also have an impact.

Fed Talk

Chicago Fed President Charles Evans said yesterday, "I do think there are benefits to adjusting the pace as soon as we can... If you don't begin to think about adjusting the pace, taking account of lags, and you just keep increasing rates by a large amount every time you get a disappointing report, next thing you know, you're at a very high federal funds rate".

Minneapolis Fed President Neel Kashkari said that supply chains are getting better, which would be a good thing for inflation.

Initial Jobless Claims

Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, rose from 7,000 to 225,000. Continuing Claims, or those that continue to receive benefits after their initial claim, rose 6,000 to 1.493M and have been significantly rising over the past few weeks. The rise in continuing could mean it's harder to find a job once let go.

Mortgage Bonds have busted through their 25 - day Moving Average and are now breaking above their 50 - day. The 10 - year has moved back beneath 4% to 3.92% and has room to go until reaching 3.775%. Continue Floating.


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