The bond market is like Fezzik

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If you’re unfamiliar with The Princess Bride’s Fezzik, you’ve got more important things to do than read what’s going on in the bond market (but 98 Little Minutes on Hulu can fix that). For everyone else, there’s this analogy: the bond market is like Fezzik. He specializes in the fight against large groups! This week’s group is the triumvirate of big announcements from central banks (Fed, BOE, ECB) in just under 20 hours. Each announcement presented itself as a bearish impulse. The net effect, by all rights, should have raised rates. But an hour after the start of the national session and the returns are lower than they were before the start of the fight.

To be clear, the “bond market” in this case refers specifically to treasury bills. They are the heroes of this story. European rates have yet to return to their lows from yesterday.

This level of resilience is either astonishing or baffling. Why can this be confusing? Simply because one may have to rely heavily on the short cover to explain it, and the short cover is not a lasting motivation.

The other way to look at it would be that the decline in central bank accommodation is deflationary, bad for stocks and good for safe havens. Using 2013/2014 as an example, the run-up to the tapering announcement was the wrong time for bonds, but the rally in 2014 started as the Fed actually reduced the accommodation. Certainly 2014 was complicated due to the ECB’s phase of seduction with QE, but it is nonetheless worth considering.


MBS price overview

Prices shown below are delayed, please note the time stamp at the bottom. Real-time pricing is available through MBS Live.

MBS

UMBS 2.5

102-06: + 0-07

Treasures

10 years

1.4280: -0.0340

Price as of 12/16/21 9:45 AMEST

Tomorrow’s economic calendar

Time Event Period Provide Before
Thursday December 16
8:30 House starts mm: change (%) Nov -0.7
8:30 Philadelphia Fed Business Index * Dec 30.0 39.0
8:30 Building permit: evolution mm (%) Nov 4.2
8:30 Number of starts mm (ml) Nov 1,568 1,520
8:30 Unemployment claims (k) we 200 206
9:15 a.m. Industrial production (%) Nov 0.7 1.6
9.45am Markit Composite PMI * Dec 57.2


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