MBS Pricing Snapshot

Bernanke has been remarkably candid in discussing the prospects for tapering QE, and while this doesn't come as a surprise, it does confirm the logical parts of the "Hype" over the past few weeks. The nail in the coffin at the moment was Bernanke's statement that Fed could act before labor day in Early September, but declined to put a date on when Fed might change pace.

The important part is that he's speaking ASSUMPTIVELY regarding tapering. Not "IF" but "WHEN," and the when is looking like it's "SOON."

MBS have gone south with a reckless ferocity, and by the time you read this, there's no telling exactly how much worse off they'll be than current levels around 102-10. 10yr yields briefly cracked 2.0 and are currently at 1.9998. Negative reprices are likely.

Before the Joint Economic Committee, Bernanke's prepared testimony has provided an early boost for bond markets. (watch it live) as he essentially says "we know what we're doing.' Here are the bullish highlights:

- Inflation is stable and likely to stay that way
- Policy is providing significant benefits
- Tightening too soon would carry substantial risk
- FOMC has made it clear it's ready to reduce QE if needed
- Policy has helped offset deflation pressures
- FOMC is aware of the risks of QE and low rates
- We'll continue bond buying until substantial labor market improvement

Taken together, these comments do much to address the burgeoning speculation over the past two weeks and provide something of an inoculation against any tapering comments in the Minutes later today. After all, this is the Chairman, whereas the Minutes will give voice to the FOMC members on the other end of the spectrum.

Fannie 3.0s are now up 9 ticks at 103-01 and 10yr yields are down to 1.9002. Bernanke is just wrapping up his prepared remarks and will soon being the Q&A portion. So far so good... With economic improvements (relative) to lean on, low inflation, and strengthening housing market, Ben has room to put pressure on congress regarding fiscal policy and take some of the focus off monetary policy. He looks like he's ready to 'dish it out' a bit today, so it should be interesting.

Keep in mind this speech is distinct from the FOMC Minutes which will be released later today at 2pm.

10yr yields touched their best levels of the week to start the overnight session and chopped uneventfully higher during Asian market hours while maintaining yesterday afternoon's strong late-day range. The Bank of Japan's Kuroda said the recent epic selling spree in Japanese government bonds isn't having a big impact on the economy and the BoJ stands ready to make adjustments to their QE programs to prevent volatility in bond markets from "spreading excessively."

Treasuries rose to their highest overnight levels after Fed's Dudley--who many see as a reasonable proxy for Bernanke himself--said that the Fed hasn't decided on timing or steps of tapering, and that such a decision would require 3-4 months. He further noted that the Fed wants to make sure markets don't overreact when that time comes, essentially confirming the current "conspiracy theory" of some evidence of "tapering talk" likely contained in today's Minutes, and the preceding scramble to get the word out over the past two weeks.

Bonds got a boost from weaker-than-expected Retail Sales in the UK, which clearly marked the turning point at weakest levels overnight. 10yr Treasuries moved from the mid 1.94's to 1.921 and coasted into the domestic session mostly sideways, but with some pre-Bernanke volatility. The Fed Chairman appears this morning in front of the Joint Economic Committee at 10am. As a "for instance" on the this speech being today's dark horse market mover, RBS characterized it as the "most appropriate opportunity" to get a "signal that tapering in the size of the Fed's monthly purchase pace is imminent."

10 yr Treasuries are currently down 1.4 bps from 5pm at 1.9159 and Fannie 3.0s are up 5 ticks at 102-29. Stocks are slightly higher vs yesterday's 4pm levels, but haven't made it back to yesterday's highs.