In the day just passed, bonds put in one more day of slow, illiquid summertime trading.  Granted, volumes were slightly better than the previous session, but the previous session saw the 2nd lightest volume in more than 3 months.  The morning's economic data brought additional apparent volatility.  This was especially evident right after the big beat in Consumer Confidence at 10am, but all of that volatility occurred well within an EXTREMELY narrow range.

In the day ahead, the Fed Announcement at 2pm is clearly the headliner although the morning's economic data could put a bit of spin on the ball.  Said spin would be fairly limited if yesterday was any indication, however.  The following chart shows this week's trading range (dotted white line box) relative to last week's.  I like to use the 3m view on the MBS Live chart because it adds a convenient blank space between weeks to help visualize these sorts of trends.  The teal, red, and yellow horizontal lines each look back one additional week.  In so doing, we see that each week has essentially fallen inside the last for the entire month of July.  We also see that the constant has been a floor just over 2%.

As far as today's tactical considerations are concerned, I'm not sure I could ever say enough to convince you that a 25bp Fed rate cut is NOT a new and positive thing for the bond market!  Some of our clients and especially THEIR clients continue to ask about mortgage rates moving lower after a 25bp rate cut.  I know most of you have already internalized this, but for the rest, repeat after me: a 25bp rate cut is old news!  It's already priced-in to current trading levels.  

To fully drive this point home, we can look at overnight indexed swaps.  These are the actual rates that big financial institutions are paying/receiving to borrow/lend big chunks of short term money.  In the case of this chart, the time horizon for these transactions is 1 month.  So today's 1-month OIS is what the market thinks the average overnight rate will be over the next month.  That's why it moves down gradually in the month leading up to a Fed rate cut.  The important part is that it has moved down almost exactly 0.25% (see the lines at 2.375 and 2.125 on the chart... those only apply to the teal 1-month OIS line). 

I threw in Fed Funds Futures and 10yr yields purely for reference.  Fed Funds Futures show us when the markets began to ramp up expectations for the rate cut.  OIS represents traders putting their money where their mouth is with respect to rate expectations.  Once futures showed a nearly certain rate cut, it would logically take 1 month for OIS to follow (again, OIS reflects the average overnight rate for the upcoming 30 days, so it doesn't fall abruptly like Fed Funds Futures).

The bottom line is that the Fed's 25bp cut, for all intents and purposes, has already happened.  The next move for markets will be based on the Fed's verbiage and the rest of the week's economic data.