Bonds put together their best session of the week Thursday, with the 30-year conventional easing 3 basis points to 6.88% after Fed Governor Waller took a September hike off the table. Most of the morning's gain leaked away by the close.

The day peaked early. By 9:20 AM ET, MBS were up a quarter point and the 10-year Treasury had fallen 3.6 basis points to 4.744% — the strongest bond market since last week. From there it drained, gradually, for the rest of the session. An alert at 3:40 PM ET marked MBS down an eighth from the mid-day highs. The close: UMBS 6.0 at 101.09, up 9 basis points; UMBS 5.5 at 98.94, up 12; and the 10-year at 4.772%, down less than a single basis point on the day. Green across the board, but a fraction of what was on the table at 9:20.

Waller was the catalyst, and the shape of the move says exactly what the market heard. The 2-year closed down 3.8 basis points. The 10-year, down 0.9. The 30-year, down 0.6. That is a front-end move — a repricing of what the Fed does at the September meeting, not a bet on the economy. And note what Waller actually said: a hike isn't necessary next meeting absent an inflation surprise. That is not a cut. The short end held its gain because that's the part of the curve the Fed directly controls. The long end gave its gain back because nothing Thursday changed the inflation or supply picture that sets 10-year yields.

For borrowers, 6.88% is a 3-basis-point improvement on levels that three days ago were the highest in more than a year. That's real, and it's small. Thursday's data didn't move anything — jobless claims printed 206,000 against a 205,000 forecast, which is noise, and Q2 unit labor costs revised down a tenth to 1.2%. The test is Friday morning. August payrolls hit at 8:30 AM ET, and Wednesday's ADP report came in at 38,000 against a 47,000 forecast. If the government count corroborates that weakness, Thursday's bounce gets legs. If payrolls come in strong, the 7% handle is back on the table.

— David Burson, NetRate Mortgage