Rally has continued into the afternoon, with the 10-year dipping down to 5.13%, up 3/8. We haven't closed that low since June 14. We aren't getting any good inflation-related data until PPI on the 18th, so you'd think it'd trade sideways until then. I'd bet on yields leaking higher.
Corporate spreads are inching tighter. As I've said, there is just too much cash on the sidelines to sustain an extended spread widening. I've talked to several street dealers who claim that there are truckloads of cash sitting at banks and insurance companies waiting for spreads to widen. But if everybody is already short, who is left to sell credit and make spreads wider?
MBS are another story, because volatility is scaring every body, and I don't think there are as many investors short MBS as are short credit. I think MBS spreads widen over the next 2-3 months while we sort out when the Fed is going to pause. At that point, there are two scenarios: either the market sees a cut in the offing, and the curve inverts more severely, or else the Fed stays steady for a while and the curve steepens. The former is bearish for MBS spreads and the latter bullish. Still, you'll probably outperform Treasuries on carry anyway, so I'm long MBS.
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