MBS RECAP: 12/5/2011

MBS shot well over their highs in recent moments, now up 2 ticks on the day at 102-07 in Fannie 3.5's--this versus a battle with resistance at 102-02+ previously. The best attribution at the moment seems to be an FT story making rounds that the S&P will announce that it's putting Germany, France, The Netherlands, Austria, Finland, and Luxembourg on "creditwatch negative," meaning a 50% change of a downgrade within 90 days.

10yr yields experience a similar jolt, as did stocks, suggesting that headline causality is likely (as opposed to simply being an issue of tradeflows, technicals, etc...). If MBS prices do anything but turn back and head quickly to 102-03, we could soon see a few of the early-to-act lenders repricing mildly for the better, with more to follow the longer the move is sustained.

(Reuters) - "There is simply too much at stake for us to be excessively complacent while the economy is in such dire shape," Chicago Fed President Charles Evans said in remarks prepared for delivery to the Ball State University Center for Business and Economic Research. "It is imperative to undertake action now."

Evans, known for his dovish views on inflation, was the only Fed policy maker to dissent last month on the decision to leave monetary policy unchanged. Then, as today, he called for further easing to boost the recovery. The U.S. central bank has "clearly" missed on its mandate to foster maximum employment and is in danger of undershooting its 2 percent inflation goal for the foreseeable future, Evans said.

Without new monetary stimulus, Evans warned, the U.S. could become mired in a 1930s-like Depression, impairing economic growth permanently as the skills of the unemployed atrophy and businesses defer new investment. To avoid such a scenario, Evans argued, the Fed should promise to keep interest rates near zero as long as unemployment remains "somewhat above its natural rate," so long as inflation does not threaten to rise above 3 percent. While 3-percent inflation may sound "shocking," he said, research shows that central banks should fight liquidity traps by allowing inflation to run above target over the medium term.

Since high U.S. unemployment is probably due to the effect of a liquidity trap rather than a structural shift in the economy, Evans said, added monetary stimulus is justified. And if, he said, it turns out that the real problem was indeed structural and easier policy sparks a rise in inflation, the Fed can simply tighten policy before it threatens to reach the hyperinflationary levels of the 1970s.

We've talked over the past few weeks about the possibility that a sideways trend in benchmark Treasuries could be an even better thing for MBS prices (and lender rate sheets) than a full-blown Treasury rally. The latest blog post in the MBS Commentary channel is linked below and has a longer-term chart of the recent spread tightening. It's not impossible, but reasonably rare to see MBS prices generally rising while Treasury prices are generally falling, as has been the case since late November. Take a look: