MBS MID-DAY: Volatility Surrounding Bernanke Speech, Followed By Improvements

MBS Pricing Snapshot

The Federal Housing Finance Agency (FHFA) today announced that it has directed Fannie Mae and Freddie Mac to raise guarantee fees (g-fees) on single- family mortgages by an average of 10 basis points. The changes to g-fee pricing represent a step toward encouraging greater participation in the mortgage market by private firms, a goal set forth in FHFA’s Strategic Plan for Enterprise Conservatorships.

“These changes will move Fannie Mae and Freddie Mac pricing closer to the level one might expect to see if mortgage credit risk was borne solely by private capital,” said Edward J. DeMarco, Acting Director of FHFA.

For loans exchanged for mortgage-backed securities (MBS), the increase will be effective with settlements starting Dec. 1, 2012. For loans sold for cash, the increases will be effective with commitments starting Nov. 1, 2012. Fannie Mae and Freddie Mac will work directly with lenders to implement the changes.

As I have discussed today, it is also true that nontraditional policies are relatively more difficult to apply, at least given the present state of our knowledge. Estimates of the effects of nontraditional policies on economic activity and inflation are uncertain, and the use of nontraditional policies involves costs beyond those generally associated with more-standard policies. Consequently, the bar for the use of nontraditional policies is higher than for traditional policies. In addition, in the present context, nontraditional policies share the limitations of monetary policy more generally: Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve; in particular, it cannot neutralize the fiscal and financial risks that the country faces. It certainly cannot fine-tune economic outcomes.

As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation. The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.

Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.

Full Text:

Essentially echoing the previous FOMC Announcement, Bernanke noted the Fed will provide accommodation as needed and reiterated the importance making further progress on growth and jobs.

In general, Bernanke danced a delicate dance, neither unveiling or hinting at anything beyond that which was already known, but also keeping the door perfectly open to the announcement of additional easing at the upcoming FOMC meeting. Notably, Bernanke mentioned that the first two rounds of Fed asset purchases may have raised US Output by almost 3 percent and lifted employment by 2 million jobs.

Bond markets have been choppy following the release of the prepared remarks with MBS and Treasuries both briefly turning red but now back into the green. Fannie 3.0's are up 5 ticks on the day at 103-14 and 10yr yields are down just over a bp at 1.6096.

All in all, Bernanke did a fantastic job of delivering a speech that was "as-expected" as possible. Barring any bigger swings between now and then, we're now waiting for meaningful responses in the questions/answers session.

- PMI 53.0 vs 53.5 consensus
- Employment indext 57.1 vs 53.3 last time

- No significant market reaction. Tame headline balaned by stronger employment component.

The Chicago Purchasing Managers reported the CHICAGO BUSINESS BAROMETER posted a small gain in August but remained steady for the last four months. Among the Business Activity measures, declines into contraction for both Order Backlogs and Supplier Deliveries offset minor gains in Production, New Orders, and Employment in August.

BUSINESS ACTIVITY:

• EMPLOYMENT recovered more than half of last month's slowing;

• PRICES PAID slight gain;

• ORDER BACKLOGS lowest since September 2009;

• SUPPLIER DELIVERIES lowest since July 2009. BUYING POLICY:

• PRODUCTION MATERIAL and M.R.O. SUPPLIES lead times decreased.

Treasuries are quickly rallying back to something closer to 'unchanged' levels vs yesterday after rising several bps to just under 1.66 in 10yr yields during the European session. 10's are now back down to 1.637 and after opening slightly weaker Fannie 3.0 MBS are 1 tick into the green at 103-10.

Volume took a step back from recent sessions overnight, despite a fairly robust offering of data and headlines as markets are ostensibly circling the wagons ahead of Bernanke's Jackson Hole speech. The WSJ notes that Columbia economist Michael Woodford (who has spoken at Jackson Hole before), will be there again today and is likely to discuss the topic of a recent paper citing the need for more transparent policy communication and stronger commitments.

ECB's Coere notes the need for budget integration before Euro bonds, but also said the ECB is working on a bond-buying program according to Bloomberg. Nothing new here. Reuters notes that Bundesbank chief Jens Weidmann (key opposition of looser ECB policy) is threatening to resign both literally and figuratively in similar fashion to Axel Weber and ECB's Stark (i.e. "we're not getting our way, so see ya!").

Relatively tame data out of Europe overnight, including flat inflation, unchanged unemployment, and weaker German Retail Sales, left the focus on the various headlines, and the decline in volume is our first clue that markets are waiting for Bernanke at 10am.

Before that, Chicago PMI hits at 9:45am and Consumer Sentiment at 9:55. After a mostly sideways week, today is the first good opportunity for markets to take a lead-off from the safety of that base, though no guarantee we'll actually see that happen. Heavy hitters are yet to come in the two weeks ahead.