MBS Pricing Snapshot

There are a few candidates for supportive inflection points in Treasuries and MBS over the past few weeks. Those are big words that can be replaced with "ceiling" in the case of Treasury yields and "floor" in the case of MBS Prices, at least when we're talking about them being "supportive."

Both were established right after last Tuesday's NFP rally. Both were revisited today, and both held their ground fairly well. Sometimes bond markets do this because there's legitimate support that will continue to hold and other times, such levels simply represent the most logical place to end a short term movement before breaking through the barrier in the next session.

While we can't know how that will play out yet, we can observe that MBS stopped selling-off before breaking below recent lows, and are heading into the late hours just 2 ticks below "unchanged" on the day. This is still a significant drop from the +10 ticks in play before the FOMC Announcement, but in the bigger picture, not the end of the world.

10yr yields are back down to 2.527 after bouncing at 2.549 earlier (an important pivot point to watch heading into tomorrow).

If you haven't seen a negative reprice yet, you probably will. Fannie 3.5s are now down 4 ticks on the day at 102-19. 10yr yields are up 3.2 bps at 2.5396.

This is a very abrupt move in the context of this week, but certainly isn't much to write home about in the bigger picture. Think of it like hitting the rumble strip on the Freeway. We were cruising along--sort of zoning out a bit, and this is a wake-up call that the Fed isn't quite as on board with the bearish reading of the market that might seem like common sense.

"The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market."

vs.

" The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall."

The second entry is from today's announcement, effectively removing the warning that tighter financial conditions could slow the pace of improvement. Nowhere else in the statement is that warning rephrased or reiterated.

In and of itself, this is likely enough to justify a negative reaction in bond markets, but the Fed made a few other subtle changes--some of them also surprisingly positive. The most interesting among these was the characterization of the housing market as being in a "recovery" as opposed to merely strengthening last time. The Fed said that labor market indicators showed "further improvement whereas last time it was "some indicators."

There were bearish aspects too, but in general, markets look to have been holding out for something FAR more cautious than what we received. You can see all of the differences HERE.

Fannie 3.5s down to 102-26 after earlier highs of 103-01. More to Follow...

Bond markets were weaker into the 9am hour, but have been almost exclusively positive since then. The only pause in the morning's rally came courtesy of a block trade in Treasury futures at 10:30am. The momentary weakness was quickly scooped up by buyers, though volume remains light in advance of this afternoon's final Treasury auction and FOMC Announcement.

Fannie 3.5's are now up 9 ticks to their best levels of the day/week/month/quarter. 10yr yields are just above their overnight lows, currently 2.482 vs 2.478. Positive reprices aren't out of the question, but are by no means likely just yet (combination of prices not being quite high enough vs most lenders' rate sheet times and hesitation ahead of afternoon events).