MBS Pricing Snapshot

Volume is nothing compared to what it was surrounding the FOMC Minutes, but it's much higher than normal for this time of day, after the 3pm pit close for Treasuries. It's not friendly volume either--currently dragging yields to their highs of the day with 10's at 2.89. Fannie 4.0s are down 15 ticks at 102-04, close to multi-year supportive lines in the sand from 101-31-102-02.

Reprice risk has been a constant companion since the Minutes, but it's even more 'companiony' at the moment, and not in a good way. Additional negative reprices are possible, ESPECIALLY from lenders who haven't yet repriced.

First of all, the Minutes stood a chance--in the minds of some market participants--to TEMPER the certainty that tapering will happen in September. If you only want one bottom line, that would be it. In other words: "nothing to suggest tapering would be on hold."

Here's some more detail in the form of particular passages that not only abstain from such counterpoints, but actually do more to confirm the Fed is more unified in their intentions (emphasis added to important bits in CAPS):

" First, ALMOST ALL participants confirmed that they were broadly comfortable with the characterization of the contingent outlook for asset purchases that was presented in the June postmeeting press conference and in the July monetary policy testimony. Under that outlook, if economic conditions improved broadly as expected, the Committee would moderate the pace of its securities purchases later this year. And if economic conditions continued to develop broadly as anticipated, the Committee would reduce the pace of purchases in measured steps and conclude the purchase program AROUND THE MIDDLE OF 2014."

Thought: The "middle of 2014" is probably more of a focus than the inception time for tapering at this point, for what it's worth.

"A few members emphasized the importance of being patient and evaluating additional information on the economy before deciding on any changes to the pace of asset purchases."

Thought: A "few" is not a majority, or even as much as "several" or "some." It certainly isn't "most" or "almost all."

"The data received since the forecast was prepared for the previous FOMC meeting suggested that real GDP growth was weaker, on net, in the first half of the year than had been anticipated.3 Nevertheless, the staff still expected that real GDP would accelerate in the second half of the year. Part of this projected increase in the rate of real GDP growth reflected the staff's expectation that the drag on economic growth from fiscal policy would be smaller in the second half as the pace of reductions in federal government purchases slowed and as the restraint on growth in consumer spending stemming from the higher taxes put in place at the beginning of the year diminished."

Thought: in other words, they're aware of the recent weakness and still almost all are on board with mid 2014 QE exit.

"While recent mortgage rate increases might serve to restrain housing activity, several participants expressed confidence that the housing recovery would be resilient in the face of the higher rates, variously citing pent-up housing demand, banks' increasing willingness to make mortgage loans, strong consumer confidence, still-low real interest rates, and expectations of continuing rises in house prices. Nonetheless, refinancing activity was down sharply, and the incoming data would need to be watched carefully for signs of a greater-than-anticipated effect of higher mortgage rates on housing activity more broadly. "

Thought: They're watching data like this morning's EHS which were stronger than expected. Rising rates aren't yet deterring the Fed from tapering.

"References to specific dates could be misinterpreted by the public as suggesting that the purchase program would be wound down on a more-or-less preset schedule rather than in a manner dependent on the state of the economy. Generally, however, participants were satisfied that investors had come to understand the data-dependent nature of the Committee's thinking about asset purchases."

Thought: This means the door is open to tapering being done BEFORE mid 2014 if data suggests it. Scary thought for bond prices.

"participants considered whether it would be desirable to include in the Committee's policy statement additional information regarding the Committee's contingent outlook for asset purchases. Most participants saw the provision of such information, which would reaffirm the contingent outlook presented following the June meeting, as potentially useful; however, many also saw possible difficulties, such as the challenge of conveying the desired information succinctly and with adequate nuance, and the associated risk of again raising uncertainty about the Committee's policy intentions. A few participants saw other forms of communication as better suited for this purpose. Several participants favored including such additional information in the policy statement to be released following the current meeting; several others indicated that providing such information would be most useful when the time came for the Committee to begin reducing the pace of its securities purchases, reasoning that earlier inclusion might trigger an unintended tightening of financial conditions. "

Thought: THE FED WILL TAPER IN SEPTEMBER OR DECEMBER, because those are the two meetings with press conferences afterward. This is nothing new from them, but reaffirms that which we've already heard. If forced to pick between Sep or Dec right now, the data since that meeting hasn't been dire enough to change any of these conclusions. The "wait and see" folks are in the minority, and "almost all" are comfortable with the content of the last 2 statements as well as Bernanke's presser. There's not as much division in the ranks of the Fed as bond-market bears were hoping for, even if there's no compelling reason to expect anything worse than what could have been expected before. That Yin/Yang struggle is likely the reason 10yr yields are no higher than Monday's 2.90, but why we're seeing plenty of volatility in determining that.

Full Minutes Release.

Going to Defcon 2. 10's at 2.882. Fannie 4.0s hitting lows of the day. Negative reprice risk is incrementally higher than the last alert.

10's shot from 2.81 to 2.86 in less than 10 seconds. MBS tanking. No way to know if this is sustainable or a knee-jerk yet, but negative reprice risk is here right now until further notice.

Here's the second daily installment of a 'heads-up' that prices are heading back toward unchanged levels after a previous alert. The story so far:
1) negative alert after Existing Sales data
2) subsequent update re: bouncing back
3) another alert prompted by 1 investor reprice, faltering prices
4) another update now as that weakness has been shaken off

Fannie 4.0s are now down only 1 tick on the day at 102-18 and 10yr yields are within 1bp of unchanged at 2.827. Trading is relatively quiet at the moment with the near term focus being FOMC Minutes at 2pm.

The bounce back after Existing Home Sales may have mitigated negative reprice risk but it apparently didn't eliminate it as one investor just repriced negatively. Fannie 4.0s are down 6 on the day at 102-13, still well off their post-data lows at 102-10. 10yr yields are similarly off their weakest levels (2.849 vs 2.858 earlier).

The combination of equities and bond market trading gives the impression of growing apprehension ahead of FOMC Minutes at 2pm, or at least a move to the sidelines. Reprice risk still isn't implied by MBS price movement, but the presence of a large investor reprice now suggests we can't rule out the same for other investors.