MBS LUNCH: Not the First Step in the Fed's Exit Plan
I keep hearing economists and analysts say, "This is the first step in the Fed's exit plan"..."The Fed is starting to remove accommodative policy"...."The Fed is pulling out" (don't laugh Family Guy fans)
Where have these market watchers been for the past 6 months?
This is not the first step in the Fed's exit plan, it is one of many that have already been taken! The discount rate hike just happens to be a bit more shocking than others. From the text of Ben's testimony, which he was unable to read last week because DC residents were literally unable to leave their homes without a snow plow and sub-zero snow suit:
"As was intended, use of many of the Federal Reserve's lending facilities has declined sharply as financial conditions have improved.Some facilities were closed over the course of 2009, and most other facilities expired at the beginning of this month"
TAF and TALF (car loans, credit card loans, small business loans,student loans) are the only two facilities still in operation. Only the CMBS window will remain open and that operation closes on July 30, 2010.
And its not even that big of a deal either. The broad broaaad majority of banks are not in need of an emergency loan. BANKS STILL HAVE A POO-LOAD OF RESERVES TO LEND OUT TO QUALIFIED BORROWERS (including other banks).
Look how liquid the banking system is! I have used the chart above three times in the past 30 days. HERE is one that you must read if you are scared this decision will disrupt money markets.
If you want to know what the first step will be the last phase of the Fed's exit strategy, READ BERNANKE'S TESTIMONY, he states his intentions very clearly:
"The actual firming of policy would then be implemented through an increase in the interest rate paid on reserves. If economic and financial developments were to require a more rapid exit from the current highly accommodative policy, however, the Federal Reserve could increase the interest rate paid on reserves at about the same time it commences significant draining operations."
Rant over...for now.
Unfortunately I do not have good news for you in regards to the rates market today. The bearish bias on "rate sheet influential" benchmark yields is loud and proud.
The 3.625% coupon bearing 10 year Treasury note is +0-01 sy 98-17 yielding 3.801%. 3.80% is technically significant. Remember the chart below from yesterday? No? Maybe because I flipped the colors. HERE it is. 3.80% is juuust above the 23% retracement of the Dec21 sell off.
I zoomed in to illustrate the relevance of this pivot point. BANG BANG. Those moments of improvement are a factor of real money accounts doing some bargain buying coupled with SHORT COVERING aka profit taking. That has been the case all week...these moves held on Tuesday because volume was incredibly thin, giving any sizable short covering tickets an extra amount of influence on prices and yields.
The 30 year mortgage market has seen under $1.5 billion in supply from originators today. Flows are moderate at best...perhaps sporadic is a better description. The MBS ninja says the 15 year coupon is getting killed today. The 30 year FN 4.0 is still in the red, now -0-06 at 96-27 yielding 4.299% while the FN 4.5 is -0-03 at 100-03 yielding 4.496%. The secondary market current coupon is 4.494%. The CC yield is +69.1/10yr TSY yield and +58.7/10yr swaps.
This is not an originator friendly chart. In MBS OPEN comments, Gus says rebate is worse by 50-100bps over the past three days. Do you confirm or ignore? If you did not catch that joke and use Facebook...you must WATCH THIS VIDEO. Do you want to skip this step?
Now...back to my rant. :-D
This is the PERFECT time to call attention to the most recent MBS WEEKLY . The Fed's decision to hike the discount rate illustrates why we think benchmark interest rates will trade in a new, higher yielding range in the months ahead, but not venture too far from 2009 high prints. While there is LESS BAD and therefore reason to speculate on stocks, there are still many reasons to be skeptical of a speedy economic recovery. Specifically HOUSING and the labor market.
Plain and Simple: Because the overall economic environment is cloudy and the Federal Reserve is still quite cautious, investors will remain defensive, which will prevent benchmark Treasury yields from moving significantly higher. On the flip side, equity bulls will rely on "THE WORST CASE SCENARIO WAS AVOIDED" perception as a reason to speculate that long term "buy low, sell high" investment strategies will be profitable. This will help stocks maintain positive progress instead of retracing back to "worst case scenario" lows. This risk taking attitude combined with a slowly recovering economy (anything but drastically worse) will prevent benchmark 10s from revisiting the days of old when yields held between 3.27 and 3.51%. The rates of 2009 look to be a thing of the past.
Uncertainty will keep the Fed from raising the FED FUNDS RATE in 2010. Uncertainty will keep rates from skyrocketing.
PS...S&P will run into firm resistance at 1200