Treasury yields took another leg lower yesterday as the uncertainty around the banking sector continues to drive investors into safe haven assets. While the number of failures remains at 2 and regulators have offered assurances that depositors will be protected, regional bank stocks still reflect a significant amount of fear. The 10yr yield gapped down in the overnight session and smacked into the 200 day moving average (just south of 3.44%) which provided a measure of resistance. The balance of the day saw a modest reversal that left 10s at 3.54% into the close. Performance of mortgage-backed securities (MBS) improved versus the day prior, but still gave secondary desks a headache. Liquidity remains poor and current coupons chopped around in a 65 basis point range. Despite an understandable level of defensiveness, lenders have improved rate sheets sufficiently to allow the average 30yr rate to fall nearly 50 basis points from its recent high last Wednesday.
The disruption in the banking sector is surely resulting in sleepless nights for Fed Chair Jay Powell and the rest of the board. They desperately want to impart a kill shot on inflation with a combination of additional rate hikes and an aggressive posture, but recent developments have introduced a serious wrinkle in their plan. Predictive markets are now assigning a 34% likelihood that the FOMC will vote to keep rates unchanged at next week’s meeting and a significant chance that they will start cutting later this year. This stands in stark contrast to all of the guidance we have heard from the Fed to date and heightens the need for clarity in the upcoming policy decision. Today’s CPI data will be closely watched in that context with the headline number expected to reflect prices that remain uncomfortably high.
Treasuries continued to give back gains in the overnight session, not only in outright terms but in the re-flattening of the curve as well. The 10yr yield is opening higher by just over 7 basis points while the 2yr is up 25. I expect volatility will remain with us for the foreseeable future and lenders will continue to be defensive with rate sheets. We will be back with more as the day develops. Make it a great one!