Rates Had A Nice Reversal Today

A nice and unexpected reversal today in the bond and MBS markets. The 10yr note auction met with good demand and the three key stock indexes reversed direction after a solid open this morning. Mostly just the continuation of the recent volatility in financial markets ahead of next week’s FOMC meeting. Still uncertainty about what the Fed will do, but some wish they would get it over with and make the move higher to put this behind markets. It has gone on way too long with too much talk and opinions. The Fed missed a window earlier this year but now has another opportunity.

If markets have not already discounted the increase, most would be shocked.  The Fed has already made it clear (if that is possible for the Fed) that it will be one-off with not another increase planned for a long time. Possibly a year away with the stagnant global economies. Economists at Capital Economics say the odds of the Fed pulling the trigger next week is 50-50, while several bond traders estimate the probability currently sitting around 30%.

Uncertainty continues, even with all of those bullish remarks that the US can withstand a global economic decline. There is little reasoning behind that kind of outlook however - we live in a global economy, why is it so difficult for some analysts and economists to understand. If they are referring that the US will continue to expand while Asia and emerging markets slow, it is like tilting at those windmills. Possibly the US can avoid recession but strong expansion is not likely. Equity markets in China, Asia and Europe rallied today setting a strong opening in US stock indexes this morning but it didn’t last. Nothing significant though that US stocks sold off this afternoon, just part of the volatility we have these days, and it isn’t likely to end soon. Wide market swings and rapid shifts in sentiment have become more prevalent since China’s currency devaluation on August 11 sparked concerns that a slowdown in the world’s second-largest economy would spread.

A good 10yr note auction this afternoon. It helped that the yield has increased from last month’s refunding 10yr auction. Tomorrow weekly jobless claims are expected to have declined, August import prices expected negative as well as export prices.  WE will also have July wholesale trade.

I do not want to get forced into floating now – but I just might come out with that recommendation tomorrow.  The action today looks a little promising but I do not expect interest rates to improve in any significant way. Stock market rules though and likely the indexes will trade lower again tomorrow. The volatility remains high as uncertainty continues - what will the Fed do next Thursday, and how bad is China’s economy really?

In summary, following a pretty good auction of 10 year notes today, bonds have managed to regain all of the losses from yesterday and this morning.  Tomorrow we have our final auction of the week, and it is not uncommon for bonds to rally once the new supply is out of the way.   With all that said, I might be looking t changing my stance to float.