FOMC Minutes Show Waning Enthusiasm For QE3. Bonds Tank.

MBS Pricing Snapshot

Weakness persists for Treasuries and MBS following today's FOMC minutes. No new information has come to light and current trading is merely the leftover aftershock from the earlier jolt, now playing out in lighter volume, after-hours trading.

10's are up to 2.2970, but did manage to hold an important supportive pivot into the official 3pm close (2.285). Fannie 3.5's are down 27 ticks on the day at 102-04. That justifies quite a bit of a shock to rate sheet pricing. MBS are now trading under the lows seen on 3/22 and 3/23. The next pivot is just under-foot and 101-24 is the central part of long term lows. Reprices remain a constant possibility.

As mentioned as a possibility in the previous alert, 10yr yields are thus far sustaining a break over the 200 day moving average at 2.252, currently at 2.27. It's not out of the question for yields to fall back below 2.252 by the 3pm close, which would still indicate a fairly positive show of support against today's sell-off. For now, it's bad. The next major support level is in the mid 2.28's to 2.290.

Fannie 3.5 MBS are down half a point on the day now at 102-15. Good supportive buying seen at 102-12, so that's the next area of concern if we see it break.

Just watching benchmark 10yr Treasuries for cues at this point. the half hour of volume seen after today's FOMC Minutes dwarfs that of the actual announcement itself on March 13th. We'll alert you again if 10yr yields test 2.29 or break back below the 200day mover at 2.252.

In case you missed the many mentions of it last week, yesterday, this morning, the detailed charts and discussion in "The Day Ahead," the alert leading up to it, and the additional alert that followed it, The MINUTES from the most recent meeting of the FOMC (the one on 3/13 that killed bond markets) were released at 2pm and essentially confirmed that the members of the FOMC are less interested in QE3 than they were in the January Meeting.

It doesn't matter that stock markets have sold off and it doesn't matter that recent Fed officials have spoken equivocally about QE3. This is a negative for the bond market because it means the bond market is slightly less likely than it had been to receive large, regular, guaranteed injections of capital after Operation Twist is over.

10yr yields backed up to 2.26 which is a TEST of the 200 day moving average, a technical benchmark that has been somewhat significant in assessing whether or not bond markets are in the midst of a large-scale shift. As of this moment, 10yr yields have held UNDER that moving average which is about as good as we could hope for given the circumstances.

Make no mistake that mortgage lenders have repriced for the worse and will continue to do so given the half point reversal in production MBS prices. But if the bleeding stops in the 102-16 to 102-18 range, that would be a great technical level to hope for some support going forward, especially inasmuch as it coincides with the 200 day moving average in 10yr yields today.

Bottom line, these are medium-sized losses in the context of recent movement, and have a decent enough chance to hold here for now. We'll alert you if 10's are sustaining a break over the mid 2.25's or if Fannie 3.5's sustain a break below 102-16.

Of course this COULD be one of those "initial knee jerk" reactions, but 10yr yields shot up 5bps and MBS dropped below 102-26 in Fannie 3.5's after Fed Minutes. Negative reprice risk is very high.

We have a decent little pop in volume and volatility in the 10 minutes before FOMC Minutes. MBS holding their own quite well. 10yr TSYs up a quick 2 bps. Nothing news or data driven. Just last minute "positioning." Still, something to be aware of as it will already have some lenders on the defensive against any post FOMC weakness. 102-29, first layer of defense, followed by 102-26, at which point reprices would become more likely.

FICO’s quarterly survey of bank risk professionals found a reversal in the sentiment of U.S. lenders, as expectations for loan repayments and credit availability were more upbeat in the first quarter of 2012 than they had been during the previous quarter. The survey, conducted for FICO by the Professional Risk Managers’ International Association (PRMIA), found fewer lenders expecting a rise in delinquencies on home loans, car loans, and small business loans than at any time since FICO launched its survey in early 2010.

Optimism appears to be growing
In the latest survey, the number of respondents expecting mortgage delinquencies to rise during the next six months was 12 percentage points lower than last quarter – dropping from 47 to 35 percent. The survey found 28 percent of respondents expected delinquencies on small business loans to increase, which is 11 percentage points lower than last quarter. And 20 percent of respondents expected delinquencies on car loans to increase, 13 percentage points lower than last quarter.

With regard to credit cards, 32 percent of respondents expected delinquencies to increase. That is an improvement of seven percentage points over last quarter and it is the lowest figure since the second quarter of 2011.

“As unemployment falls, even modestly, and four years of deleveraging begin to pay dividends, bankers are allowing themselves to feel some optimism,” said Dr. Andrew Jennings, chief analytics officer at FICO and head of FICO Labs. “Of course, we’re not out of the woods. Foreclosures continue to put pressure on home prices, and jobs are coming back slowly. But we seem to be headed in the right direction. If we can avoid major bumps in the road, such as a spillover effect from the Eurozone crisis, we should continue to see delinquencies drop.”

Heading into this afternoon's FOMC Minutes, markets have definitely been trying to conform to the guidance given by other parts of the market. In other words, stocks and bonds each show signs of paying attention to the other for cues.

This is most noticeable in the run up to the close of several European stock indexes at 1130am New York Time. That weakness is generally being attributed to Spain. Reuters notes:

"The Spanish stock index IBEX tumbled 2.7 percent, hit by worries over Madrid's ability to tackle its debt burden while its economy flounders. Spain's debt will jump to its highest level since at least 1990 this year as the economy sinks into recession and borrowing costs rise, a document detailing the country's 2012 budget showed, pushing Spanish 10-year bond yields ES10YT=TWEB up to 5.43 percent."

Although other European indexes were less bruised than Spain's, declines of around 1% in many cases took their toll on domestic stocks and lifted European and domestic bond markets. While 10yr yields fell into the 2.15's, we're seeing increasing hesitations in moving lower from here. To do so would be to enter uncomfortably bullish territory ahead of the FOMC Minutes that are so widely regarded as having the potential to take things in the other direction.

Nonetheless, bond markets are pushing their best levels of the day and MBS are trying to keep pace. Fannie 3.5's haven't been able to crack above 103-02. You might see a bit more positivity in bonds if recent momentum continues. Today's best levels could be pushed out a bit further, and with MBS operating in a narrow range near the highs, some lenders might deign to reprice positively even before the FOMC minutes (less than 2 hours away) but we'd ultimately expect 2.14-ish to be sort of the short term floor in 10's if that happens.