Rates Defended The Ceiling Last Week; Bigger Battles Ahead

While it’s impossible to predict the future when it comes to financial markets, it’s usually possible to identify the events that have higher potential to cause bigger swings. Other times, volatility strikes on days when it wasn’t entirely expected. That’s how this past week began.  After Monday’s holiday closure, rates jumped higher on Tuesday morning without warning.  What would a “warning” have looked like?  It could be as simple as the presence of a scheduled economic report with a history of causing a volatile market response.  Tuesday had none of those, but it did have a legitimate market mover pulling the strings behind the scenes. The puppet master in question is a bit esoteric without a quick refresher:
Interest rates are based on bonds.
The Fed sets a target for the shortest-term bonds, but the market trades it out from there.
There are all kinds of bonds. US Treasuries are government bonds.  Mortgage backed securities (MBS) are bonds tied to mortgage cash flows.  Municipal bonds finance local government operations.  Corporate bonds finance various spending/investment needs for large companies.
All these bonds are slightly different in their risk and reward, but they are all part of the same asset class in the eyes of investors.  Specifically, bonds are a “fixed income” investment that allow investors to receive a fixed schedule of repayment with interest.  
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