Yesterday

- MBS tanked early, pretty scary for a bit

- After the herd calmed down, Fannie 4.0s battled back to "only lose" 2 ticks

- Treasuries were weaker out of the gate, but perfectly flat all day

- Post-Taper fate is being accepted

Today

- Ghost town after GDP

- Tradeflows may trump GDP anyway

- There may be too few tradeflows to both analyzing them

- The year of 2013 essentially ended yesterday with bond markets accepting their post-taper fate.  The rest is just "watch and react."

Strategy

Here is a fact about the last 48 hours: on the day of and the day after the Fed finally announced tapering, the most relevant MBS coupon for current rate sheets lost only half a point.  The basis for that claim is Wednesday's 14 tick loss and yesterday's 2 tick loss in Fannie 4.0s (for a total of 16/32nds or half a point). But that is the very best thing that could be said about the current moment in time for MBS.

Why?

Because most the the great "Fed Taper Sell-Off" happened in reverse--a 6 month slow-motion train wreck.  Especially since the November 8th NFP, we've had more than our fair share of inexplicable weakness.  Additionally, the weakness we could tie to data and events always seemed to be a bit freer-flowing than the strength derived from the opposite sort of data.

In short, the deck seemed stacked against us.  That writing was increasingly on the wall heading into the most recent jobs report--even more so when bond markets didn't sell off afterward.  From there, things got very disconcerting as 10yr yields held that 2.88 to 2.84 range incessantly, heading into FOMC.  Think "quiet... too quiet!"

That narrow range suggested that markets were right where they wanted to be.  We really could have sold off much more, but the Fed threaded the needle by going with the small taper amount, and some supportive verbiage.

Herein lies the badness: MBS and Treasuries have been more resilient than we'd expect after the Fed tapered, even if  by a smaller-than-expected amount.  And that leaves us at the weakest levels in more than 3 months!  Bond markets are sending the message that they're OK with 10yr yields at 2.92 and mortgage rates at 4.625%!  Badness!

Realistically, that's not a terrible thing if it's happening gradually and if clients are happy and originators can keep pipelines full, but we have QM uncertainly, LLPA hits, and the expectation of another $10bln per Fed meeting likely to continue weighing on rates, all while housing metrics were just beginning to visibly lift off a protracted stint in the sewer.  "Perfect storm" is an overused metaphor any more, but suffice it to say, the coincident timing of these factors could make for some more badness.

Oh, and there's some data today too: the final reading on 3rd quarter GDP is expected in at 3.6% in line with the 2nd revision.  Markets will be a ghost town shortly thereafter, leaving low volume and light liquidity to grease the skids for volatility.