There is a fair amount of chatter in the marketplace that the Fed is planning on hiking the discount rate again.

Remember the Fed  bumped the discount rate on February 18, from 0.50% to 0.75%...which caused a lot of commotion in the marketplace in the day's following the announcement. If the Fed does indeed order the N.Y. desk to make this policy adjustment, it doesn't mean much fundamentally because the banking system is still super liquid/flush with excess reserves. We discussed the economics of the discount rate hike in THIS BLOG POST. Re-reading it will give you an edge when clients come calling, nervously interrogating you about how this move will affect their rate. 

The rumor is affecting  the general sentiment of the marketplace though....

Even though the IMF is said to be standing at the ready to come to the rescue of Greece...firmer U.S. monetary policy dollar is pushing forex flows into the dollar the expense of the Euro.

Stocks are up in eight consecutive session. These rumors are allowing traders to consolidate profits and move to the sidelines until the rumor mill runs its course.

Oil prices are down, which is dragging stocks down.  Albeit only marginally. The S&P is -0.33% at 1162. The Dow is up 0.15%. The NASDAQ is down 0.1%.  Check out what sector is weakest performing on the S&P: OIL! Blame the stronger dollar (which is better because of discount rate hike rumor) 

The stock lever is  still disconnected from the bond market. Rates traders are more focused on positioning themselves for "supply to come" in the short end of the curve. The discount rate rumors are doing nothing but intensifying the yield curve bear flattening auction supply concession, which was discussed in the previous post .

MORE LOGIC BEHIND THE FLATTENER:  weakness in the short end is factor of auction supply and nervous fundamental sentiment surrounding FOMC monetary policy. Another discount rate hike reminds the market that accommodative policy will not be around forever and eventually the overcrowded arbitrage trades in the short end of the yield curve will be need to be liquidated...in a hurry. No trader wants to be stuck holding  this position, trying to "sell down the ladder" (buyers market) as it would carry a significant loss.

The 2yr note is holding onto losses that pushed yields up to 0.97%. The 10 yr note is trending higher as well, but not as much (curve flatter).  After hitting an intraday high of 3.675%, 10s briefly tested the waters of a  short covering induced bargain buying rally...which promptly failed.  Currently the 3.625% coupon bearing 10 year note is -0-07 at 99-20 yielding 3.668%....holding steady near the most originator unfriendly levels of the day.

The FN 4.5 is managing to keep its head above the 101-00 pivot, but really struggling with 101-02.  The FN 4.5 is currently -0-4 at 101-00 yielding 4.388%. The secondary market current coupon is 4.349%. The current coupon yield is 67.7 basis points over the 10 yr TSY note and 64.3bps over the 10 yr swap.

 A move below the 101-00 pivot would instigate a reprices for the worse.

While rumor and light participation (aren't you watching the NCAA tournament?) are likely distorting rates reality (today's weakness is not necessarily indicative of a bearish shift in sentiment)...this is a good time to lock.

If you are in the float boat and looking to close in March, you do not have much time left to lock (and stay in compliance). We are seeing the aggressive side of the rebate range. If you live by the "PLAY THE RANGE UNTIL THE RANGE PLAYS YOU" motto...your LOCK AT THE PRICE HIGHS alarm bell should be going off loudly.

Rebate is very aggressive, near the best levels of the year actually. 

REPRICES FOR THE WORSE IF THE FN 4.5 BREAKS 101-00