Recently, the flatter and more predictable rates have been seen as a blessing, although the proximity of the sideways range to long-term highs is perceived as more of a curse. There is a growing concern that additional banks may face the risk of failure, and certain economic indicators indicate the presence of recessionary cracks. However, inflation and labor market data have not yet shown a clear shift that definitively suggests a downward trend in rates as the next major development. As long as this deadlock remains unresolved, bonds will face considerable challenges in moving away from the ongoing sideways grind.
With the exception of the year-end drift observed in December and the brief disruption caused by robust economic data in February, bonds have maintained a remarkably consistent range for a span of six months. Throughout this period, their movement has been predominantly confined within this established range.
Since late March, the range has been subjected to 3-4 feeble endeavors to break free. Notably, the two most recent attempts have exhibited diminishing strength, further emphasizing the significance of the range and the unmistakable signs of consolidation. In the mortgage rate realm, the distinctive pattern of “higher lows and lower highs” is readily apparent, serving as a clear indication of the prevailing market conditions.
The ability of rates to maintain a sideways trajectory, approximately 0.75% below the peak levels of 2022, is a notable achievement. In comparison, Treasuries can hardly make a similar assertion, while Mortgage-Backed Securities (MBS) face even more challenges. One prominent obstacle is the surplus influx of unanticipated supply resulting from the FDIC’s liquidation of assets from failed banks, which poses a clear headwind to MBS.
The prominent data highlight of the week is likely to be Tuesday’s Retail Sales report, projected to reach 0.7 compared to the previous figure of -0.6. While it is unlikely that the outcome will be significant enough to disrupt the existing range, it can provide valuable insights into the volatility that may occur within the established boundaries.