Right out of the gate this morning, NY Fed President William Dudley set a rather negative tone for bond markets with several comments that essentially smacked down some of the recent low-rate momentum.   Here are the newswires in question, with each followed by a bit analysis:

  • "VERY CONFIDENT" THAT THERE IS "QUITE A LONG WAYS TO GO" IN THIS ECONOMIC EXPANSION
    • The "age" of the current economic expansion is one of the talking points for bond bulls.  They argue that we've now been creating more jobs for a longer period of time than almost any other economic expansion in history.  Dudley says that's no big deal.
  • FLATTENING YIELD CURVE NOT A NEGATIVE SIGNAL FOR U.S. ECONOMY
    • Normally a flattening (and ultimately, "inverted") yield curve is a sign of a shift in the economic cycle.  Dudley says it's just a reflection of global financial markets this time 
  • HALTING TIGHTENING CYCLE NOW WOULD IMPERIL ECONOMY
    • In other words, Fed rate hikes and reinvestment tapering won't prematurely bring about an economic shift.  In fact, Dudley is saying the shift is more likely if the Fed STOPS removing accommodation.  
  • RATE HIKES HAVE NOT TIGHTENED FINANCIAL CONDITIONS TO ANY SIGNIFICANT DEGREE
    • In other words, "we can keep hiking."
  • EXPECTS TO GET 3 PCT WAGE GROWTH OVER NEXT YEAR OR TWO
    • It's one thing for the average Fed member or economic forecast to say 3% growth, but Dudley doesn't have a history of cheerleading.  Again, he's a pragmatist who aims for accuracy versus flights of fancy.

This was worth an immediate move from roughly 2.14 to roughly 2.175% in 10yr yields and drop from 103-07 to 103-01 in Fannie 3.5 MBS.  From there, Treasuries would continue leaking into weaker territory throughout the day, plagued (relatively) by corporate bond issuance and the absence of European trading in the afternoon (which had helped us hold ground this morning).  

To be sure, there was nowhere near as much reaction to Dudley in terms of Fed Funds Futures when compared to, say, last Wednesday's economic data.  Nonetheless, it set a poor tone to begin the week, and perhaps a poor tone in general to see one of the Fed's "big 3" essentially dismiss most of the foundational points of the low rate thesis.