MBS Day Ahead: Which Side of the Market is Lying?

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Posted To: MBS Commentary

This is a concept we've revisited a few times over the years and it goes something like this: A strengthening economy implies rising earnings/profits among companies and therefore, higher stock prices. The same strengthening also supports higher long-term interest rates. This is the incredibly logical , slightly oversimplified underpinning of the notion that stock prices and bond yields tend to move in the same direction. Indeed, we frequently see that correlation, but invariably, we see a departure from it at times. This results in questions about which side of the market is telling the truth. Now is one of those times, as seen in the following chart of S&P futures and 10yr yields. The chart above could be argued several ways. On one hand, we could use it to make a case for bond market…(read more)

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