MBS AFTERNOON: Fed Minutes Clips And MBS Rally

By: Matthew Graham •

The minutes from the most recent Fed meeting are out and though no measurable response is present in MBS, at the very least, it can be said that the previous momentum of the rally is remaining unchallenged.  Chalk this up to the following positives from the FOMC minutes:

  • Because upturn expected to be slow and inflation subdued, rates should be kept low for a long time
  • reduction in downside risks offset by slow pace of recovery suggests no need to expand or cut asset purchases
  • officials saw economy recovering "only slowly" and still vulnerable to shocks, especially bank credit losses
  • slack seen fostering potentially falling wages
  • developments are broadly positive, but many markets still strained
  • labor market conditions in particular remain of concern
  • commercial real estate shoe may be dropping
  • uncertainty regarding houshold savings
  • households continue to face tight credit conditions
  • committee discussed buying ARM's
  • Tapering of purchase programs may be helpful in lieu of abrupt scheduled conclusions

The two most important components here are the expectation of an extended period of low rates combined with the absence of negative mortage-related surprises.  In other words, nothing was mentioned about ending the program early and in it's context, the "tapering" actually refers to EXTENDING buying so that it does not end abruptly.

Among the verbiage that could have had a negative impact on the bond market had it not been overshadowed by the above points...

  • "downside risks reduced"
  • Data and reports strengthen the notion that the downturn is ending with growth to resume in the second half
  • falling wages  may coincide with price inflation over the next few years
  • consumer spending seen in the process of leveling out
  • signs of stabilization in housing sector

That was pretty much the extent of sentiment that would be considered unfriendly to bonds.  Overall, the picture painted is more cautious and methodical than the one that equities markets seem to have had in mind over the past several months.  It's a good thing too because really, the only thing the bond markets could be on the lookout for these days would be "negatives" as there is not much by the way of "positives" that one could hope to hear in FOMC minutes.  In other words, rates PROBABLY aren't going to go lower than ZERO PERCENT, purchases of MBS and Tsy's are PROBABLY not going to expand beyond their current amount which is technically described as "frickin' huge," and the inflation outlook PROBABLY can't get any better than levels forecast by current erudite verbiage: "can't wait for 39 cent cheeseburger Tuesday's at McD's again.

I think MG is trying to say inflation has been a non-issue...

Indeed...  The reaction to the minutes is actually not much of a reaction at all.  MBS prices are pushing up  fairly aggressively in a manner common to post-summertime lows and technical resistance breaking.  In other words, we're coming out of the ugly summer months and now have confirmation of a broken ceiling.  But that brings us to an infinitely more important ceiling level in both MBS and Tsy's characterized by the very best levels of the entire summer. 

We may dance around for a while, but history's vote is for a short stay here before correcting for several weeks.  Ultimately gains normally win out into the winter, but given the month-long uptrend combined with past precedent, a nominal retracement would be a NORMAL and HEALTHY part of bond market positivity into the winter.  So AGAIN, the vote remains for careful assessment of HOW MUCH OF THE GAINS ARE BEING PASSED ON BY LENDERS!  Each passing day is another step closer to what will PROBABLY be a bit of price correction in the bond market.  Proceed at your own risk.

MBS, Tsy, and LIBOR Quotes