MBS Pricing Snapshot

The current move to the upside was in the works before Bernanke began his press conference. It began as an organic technical bounce with perhaps a bit of hesitation to extending earlier moves ahead of additional important data left in the day (forecasts and presser). The forecasts certainly did nothing to send bonds back toward weaker levels and indeed took a moderate chunk out of stock prices.

Now as the Bernanke presser is underway, MBS continue firming, back to morning levels for the most part, with Fannie 3.0s actually doing better than 3.5's relative to themselves (i.e. 3.0's well into morning range, near top while 3.5's are now just barely cracking into it).

It's a "weird" time for rate sheet risk where the earlier-to-act lenders could be considering positive reprices (we've seen one so far) while other lenders may still have yet to get out their negative reprices from earlier weakness, though given current price levels, we'd generally expect increasing chances of "corrective" positive reprices and decreasing chances of lingering negative reprices. Your best clue there is twofold: past experience + whether or not a particular lender already released a reprice on the day.

Appropriate Timing of First Hike:

Year current / previous
2012......3..............3
2013......3..............3
2014......7..............7
2015......6..............4

Appropriate Rate Levels At End Of 2014

Range.....current/previous
<1.0%..........11..........7
1.0-2%...........4..........3
2-3%..............3..........7

On June 20, 2012, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to continue through the end of the year its program to extend the average maturity of the Federal Reserve’s holdings of Treasury securities. Specifically, the Desk was directed to purchase Treasury securities with remaining maturities of 6 years to 30 years and to sell or redeem an equal par value of Treasury securities with remaining maturities of approximately 3 years or less. The continuation of the maturity extension program will proceed at the current pace and result in the purchase, as well as the sale and redemption, of about $267 billion in Treasury securities by the end of 2012.

The FOMC also directed the Desk to continue reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities (MBS) in agency MBS, and to suspend, for the duration of the maturity extension program, rolling over maturing Treasury securities into new issues at auction.

Treasuries and stocks moving in unison now as both crest their highs of the day in a relatively swift reversal from "risk-off" to "risk-on." MBS aren't suffering as decisively as TSYs, but are down another several ticks to 104-24 in Fannie 3.5's. Negative reprices are increasingly probable, but we're still not seeing an "end of the world" sell-off by any means.

MBS are gradually leaking to weaker levels following the FOMC Announcement, chiefly because they got no specific mention other than to simply note that the MBS reinvestment policy is ongoing. Treasuries, on the other hand, go more time and money thrown at the Twist program--a result that markets largely expected.

Even so, current trading levels are within very tame distances of opening levels. Despite some volatile swings, MBS are only down another 3 ticks from pre-FOMC levels and Treasuries are about 4 bps lower (in 10's). 30yr Treasuries have been a bigger beneficiary, but even they have not yet made it back to yesterday's low yields.

So in the bigger picture, the move is extremely well-contained. Stocks and Treasuries look to have bounced higher from the initial knee-jerk, and markets are likely now waiting on FOMC Forecasts at 2pm before breaking beyond recent extremes. In the meantime, some lenders might consider repricing for the worse, but it's not one of those "sure thing" sell-off's. In other words, MBS aren't free-falling here... simply struggling with some feelings of exclusion from the FOMC announcement. They'll either get over it by the time 2pm data or the 2pm data will suggest a different direction or level of intensity.

More to follow, so far so good.