MBS RECAP: 2/15/2012

Although no significant progress was made on the call and no significant plans were announced, MBS and Treasuries aren't bouncing back quite as forcefully as we'd like to see in order to rule out potential reprices for the worse. A lot depends on the lender in question, but at 103-26 currently, down from highs today of 104-02, it does feel like a slight risk that things haven't turned around from the post-conference-call negativity. Most probably won't reprice, but some might unless things turn around right away.

The Eurogroup conference call ended moments ago with president Jean-Claude Junker saying that substantial progress has been made and that he is confident decisions will be made at a Eurogroup meeting on Monday.

MBS have reacted by quickly moving into a defensive stance that belies the movements in broader markets. Case in point, Fannie 3.5's moved down from 104-01 to 103-25 initially, whereas 10yr yields didn't move much higher than 1.93. Early in the day, the same level in Treasuries coincided with MBS prices closer to 103-29. As MBS correct their pace a bit, we see exactly those prices prevailing.

Things should be lined up a little better from here on out, but details regarding the call are in short supply. If Fannie 3.5's hold 103-29, or close to it, risks of reprices for the worse are limited, but we couldn't rule out a lender or two being spooked by the sudden sell-off. At the very least, it seems that the most meaningful information on the current status of the Greek bailout won't be available until Monday, and thus feel the present moderation in the bond market's reaction is understandable. Keep an eye on 103-29 in the short term and 103-23 as a more concerning support level in Fannie 3.5's, as would be a break above 1.94 in 10yr yields.

A few of the key paragraphs:

"A few members observed that, in their judgment, current and prospective economic conditions--including elevated unemployment and inflation at or below the Committee's objective--could warrant the initiation of additional securities purchases before long. Other members indicated that such policy action could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run. In contrast, one member judged that maintaining the current degree of policy accommodation beyond the near term would likely be inappropriate; that member anticipated that a preemptive tightening of monetary policy would be necessary before the end of 2014 to keep inflation close to 2 percent. "

"Participants also provided qualitative information on their views regarding the appropriate path of the Federal Reserve’s balance sheet. A few participants’ assessments of appropriate monetary policy incorporated additional purchases of longer-term securities in 2012, and a number of participants indicated that they remained open to a consideration of additional asset purchases if the economic outlook deteriorated. All but one of the participants continued to expect that the Committee would carry out the normalization of the balance sheet according to the principles approved at the June 2011 FOMC meeting. That is, prior to the first increase in the federal funds rate, the Committee would likely cease reinvesting some or all payments on the securities holdings in the System Open Market Account (SOMA), and it would likely begin sales of agency securities from the SOMA sometime after the first rate increase, aiming to eliminate the SOMA’s holdings of agency securities over a period of three to five years. Indeed, most participants saw sales of agency securities starting no earlier than 2015."

Not much to say here... Bond markets are bullish on the distinct LACK of inspiring developments in the Greek bailout saga. The hotly anticipated Eurogroup meeting became a conference call yesterday, and now becomes potentially non-existent today after some officials are proposing an outright delay and reworking of the plan until after Greece's elections in April.

Fannie 3.5's broke above the 103-29 pivot point for the time being and have bounced around 103-30 to 103-31 in the past few minutes. A few of the characteristically early-to-act lenders could already be considering the first reprice of the day, with that becoming more and more likely the longer the current breakout persists, or the higher prices go from here. Still a bit early for most lenders to get involved, but we're getting there.

We'd unwind a decent measure of this expectation if prices soon fell noticeably below 101-29.