Bonds sold off on Thursday in a move that was as easy to chalk up to position-squaring ahead of CPI than anything else. The recent uptick in oil prices is also worth noting, but only if we remember that correlation is not always causality when it comes to that pairing. Given the absence of big ticket econ reports during the shutdown, Friday morning's CPI is getting plenty of attention--more than it deserves, to be sure, and much more than it would outside a shutdown. That said, the data is just as "live" in terms of its potential to cause volatility.
Slow, steady selling overnight and flat so far at weaker levels. MBS down 3 ticks (.09) and 10yr up 3.3bps at 3.98
11:20 AM
MBS down 6 ticks (.19) and 10yr up 4.8bps at 3.995
01:17 PM
Flat at weaker levels. MBS down 6 ticks (.19) and 10yr up 4.9bps at 3.996
Lock / Float Considerations
While rates remained near long-term lows on Thursday, it's time to consider higher volatility risk associated with Friday morning's CPI release. There could be more focus than normal on CPI given that it is the only big-ticket government report that is coming out during the shutdown. Combine that with Thursday's underlying bond market weakness and it presents an argument in favor of a slightly more defensive lock/float stance. Of course if inflation is much lower than expected, bonds can certainly extend their recent rally, but as always, the market is already priced for everything it can know about how the data will come out.
