Bond markets got the "active" twist for which they were hoping when the Fed said today that it would sell $400 bln worth of 3month to 3yr Securities and reinvest them in longer maturities as follows:

- 32 % in 6-8 yrs
- 32% in 8-10 yrs
- 4% in 10-20 yrs
- 29 % in 20 to 30 yrs (surprisingly robust vs expectations)
- 3 % in TIPS

It's no coincidence that 10yr yields are in line with their lowest, most hopeful levels of the day as the FOMC announcement gave bond markets every bit of what they'd hoped for. This also confirms that the ramping up of intensity of Fed verbiage and action seen in the last FOMC statement was not a one-off deal.

Specifically, the recent widening of MBS spreads may have been effectively reversed today as our namesake made singular mention in the statement when the Fed committed to reinvesting proceeds from MBS payments and payoffs BACK INTO MBS as opposed to elsewhere in the fixed-income world. That's a huge boon for MBS vs Treasuries.

Bottom line, we think this confirms that it's safe to get into 3.5's as the dominant MBS coupon and the statement is the first indication that "it's only a matter of time. Fannie 3.5's are up 1 pt and 7 ticks on the day (39 ticks) to 102-29. The previous "concrete ceiling" was 101-25 and is now demolished.

Reprices for the better should be on the way this afternoon, but keep in mind that lenders can't just immediately adjust pricing to reflect changes in MBS. It will be a slower and more gradual process than some of us might expect, but average rates in the high 3's are on the way (probably!). And that should begin with some moderate reprices for the better this afternoon.

...To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.

The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013...

READ THE FULL TEXT HERE

Hate to say it, but it's possible to see a panic reprice for the worse as MBS trade in an expanding range of volatile, low volume trading. If a lender is having second thoughts about recently releasing an aggressive rate sheet or about an aggressive reprice for the better near the highs, it's not out of the question that we might see a reprice for the worse.

Rarely will you see half point moves in the price of 10yr Treasuries (currently up half a point, dropping the yield to 1.88) with LESS volume than has been seen this morning. less than 600k 10yr futures contracts have come across so far today, versus 1.5 mln last Thursday.

The low volume exaggerates the movement, likely drawing it's ongoing directional preference from the BofA downgrade after already rallying in preparation/expectation of a specific commitment by the Fed to purchase longer-dated Treasuries.

MBS are merely trying (and failing) to keep pace with 3.5's only 7 ticks better on the day at 101-28 and 4.0's up 10 ticks at 104-25. But both of these levels are slightly ABOVE the "concrete ceiling" that has capped every single trading session near historic highs for MBS. And the day is still young enough that MBS Prices might be back below those levels by closing time.

The bottom line is that there's likely a huge explosion of volume waiting in the wings after the FOMC announcement and it will be that volume and trading that determines whether or not the current rally has the right to stick around.

On most other days, current gains in MBS would be enough to see improvements in loan pricing across the board. We MIGHT see reprices for the better even before FOMC, but they'd be fairly minimal, both in terms of number of lenders participating and in the actual amount of improvement. Bottom line is that if you're planning on locking before FOMC, you might want to wait until closer to the announcement to see if your lender coughs up an eighth or two.