Long Bond Ripped as Fed Focuses Buys on Belly. DON'T PANIC!!!

I'll get to the Fed Statement soon. For now let's talk about the market's knee jerk reaction....

The FOMC has directed the NYFRB's Open Market Trading Desk to purchase an additional $600 billion of longer-term Treasury securities by the end of the second quarter of 2011.This is what we expected! Unforunately the long end of the yield curve sold off and pulled MBS prices lower as profit takers ripped the long bond after realizing the Fed would focus their asset purchases in the belly and largely ignore 30yr bond coupon passes (only 6% of buys). This is a rational reaction in the market. I would expect new speculative steepeners to be put on vs. 30s.

The bad news is 10s got sucked into the bear steepener too.  This move was not rational like the sell off in the bond. 23% of the asset purchase program will be spent on the 7-10year sector. That is a majority! This is why I kept saying "DON'T PANIC".  All signs point toward a "sell now ask questions later" knee-jerk. Selling has since stabilized and flows turned two way. This is a good sign as it implies the market is building a base to make a directional move. With the herd still largely LONG and the Fed's buying strategy focused on our benchmark guidance givers, that move is expected to be mortgage rate friendly.

The 10yr note is currently UNCH on the day at 100-09 yielding 2.592%. Off the 99-24 price low and wel under the 2.645% yield high. We're already seeing a turn around but 10s must break 2.59% before further gains can materialize. TY is at the price highs, this will create resistance as well. Don't panic.

In MBS space production coupons are greatly outperforming. The December FNCL 3.5 is +0-03 at 100-17 and the FNCL 4.0 is +0-08 at 103-04.  Flows were two way after the FOMC Statement was released with bargain buyers clearly in the market at the price lows. Spreads will widen into the TSY recovery rally.

DON'T PANIC.