The Day Ahead: Fed Buybacks, Light Volume, Volatility Expected

Bond markets opened slightly weaker on uneventful overnight session.  Last night was perhaps the least dramatic of the week in terms of the European headlines and events that we've all come to know and love as the primary source of domestic market movement. 10yr yields leaked slightly higher, but in a narrow range of 1.89 to 1.94. 

In the news, Italy's lower house passed a vote on their recently announced austerity measures, which now move to the senate. That could pass perhaps some time next week and could be a slight detractor of bond prices. The FT reports that the EFSF has prepared a "draft prospectus for the latest eurozone bail-out instruments" which includes "warnings to investors that the euro could break apart or even cease to be a lawful currency entirely." While this isn't really NEW news, the fact that the EFSF is considering making it part of their prospectus may raise a few eyebrows. 

The Consumer Price Index reported at 830am, here's the live update from the MBS Live Dashboard:

ECON: Consumer Price Index Unchanged, Core Slightly Higher 8:43 AM

Consumer Prices in November were effectively unchanged, falling 0.019% versus a consensus of +0.1%. But excluding food and energy, the so-called Core CPI rose slightly faster than the expected 0.1% at a pace of 0.1731%. This brings the year-over-year headline CPI to +3.4% vs a +3.5% consensus and the Core to +2.2% vs a +2.1% consensus. 

Energy prices fell, let by a 4.4% decline in natural gas, the biggest in a year. Gas prices fell 2.4% as well. Food, Housing, and Rent all increased 0.1%. 

This report came in close enough to the consensus and has fallen far enough from its previous perch as one of the most anticipated economic indicators of the month, that we're seeing limited, but slightly positive reaction in bond markets. 10yr yields are down to 1.911 in the 10 minutes following the report. Fannie 3.5's shared in the positivity at first but just ticked down from 102-15 to 102-13. Trading in MBS is choppy and illiquid.

http://www.bls.gov/news.release/cpi.nr0.htm

Beyond that, the Fed buybacks could see some strategic bets before and after, which could exaggerate price movement in what's expected to be a fairly light volume day the further along it goes.  That exaggerated price movement is evident more so in MBS, as seen in this clip of Fannie 3.5's and 10yr yields on MBS Live: