MBS Hit All-time Highs Following Fed QE3 Announcement

MBS Pricing Snapshot

MBS can't control their enthusiasm after the Fed announced MBS-Specific QE3 today, adding enough dedicated purchase money to the buy side each month to completely obviate any other buyers. Not only will the reinvestment of MBS proceeds continue, but now there's another $40 bln per month, to continue as-need, indefinitely.

Needless to say, this was well-received by MBS. Treasuries were very "pouty" at not getting any specific new mention and really "no love" other than the extension of the ZIRP verbiage ("zero interest rate policy) to "mid 2015" from "late 2014" previously. Treasuries were an easy sell following the announcement, but were able to find their footing around 1.83 in 10yr yields.

10's are all the way back down to 1.73 now and as we suggested, after the initial gyrations and variations between Treasuries and MBS, the two have hooked back up on the way to better levels. Because MBS never really took their foot off the accelerator, once broader bond markets began rallying together, MBS flew easily to ALL-TIME HIGHS.

For Fannie 3.0s, that's a whopping 104-20. The previous all time high was 104-13. Volumes are insane, easily trumping last week's NFP day, and some of the highest we've seen since the hullabaloo in March and April. Lenders have already repriced positively and more may be on the way to whatever extent lenders can handle the additional business. Without commenting on the potential long-term affects of more MBS-specific Fed buying, this is a major short-term victory for MBS. Very big news. Very big reaction.

In the last 2 rounds of the Fed's economic forecasts, 7 members favored 2014 as the appropriate timing for the first Fed Funds hike with 3 members each favoring 2012 and 2013, and the remainder 2015. Today's forecasts indicated a large shift toward the 2015 camp with 2 of the 3 "2012" votes moving upstream, 5 of the 7 2014 votes moving higher and one FOMC Governor moving to 2016. That's not the first time we've seen 2016 votes in the forecasts, but it is the first time we've seen 2015 take such a majority. "Twelve" is a colossal number in terms of solidarity among Fed Members.

GDP forecasts were similarly revised into more bearish territory with the range of projections falling from 1.6-2.5 to 1.6-2.0. Unemployment forecasts tightened up from a range of 7.8-8.4 to 8.0-8.3 and inflation forecasts were relatively unchanged.

Market response to the generally economically bearish forecasts has been essentially non-existent compared to the FOMC Announcement, but stocks moved higher, ostensibly on the absence of a lower "low-range" GDP estimate. Treasuries have flattened out with 10's around 1.78, and MBS continue doing the happy dance with Fannie 3.0s around 104-01. Bernanke is beginning his Press Conference now.

Fannie 3.0s are up to 103-28 at the moment as Treasuries bounce back from hitting 1.83. MBS actually did go negative for a few brief moments, but are now well into the highs of the day. We get the sense that MBS were feeling out their level of spread adjustment vs Treasuries and have progressively been able to reconnect.

We should now begin seeing some more correlated movements with the initial "you go one way and I'll go the other!" moves following the Announcement. So now that 10's are down to 1.7785, MBS are continuing to ratchet higher, approaching the 104-00 level.

In terms of another broadly positive bond market indicator, the 30yr WI yield just crossed it's pre and post-auction lows. Things should be getting even stronger in short order.

Things are exceedingly choppy following the FOMC Announcement. Fannie 3.0s briefly fell to 103-13, but have since rebounded to 103-17, the same levels from before the announcement. Treasuries have taken the news quite hard by comparison, with 10's up to 1.80. S&Ps are much higher though were capped out at 1448+.

Negative reprice potential is at bay while we say in this 103-17 to 103-20 range, but the caveat is that some lenders may not care for the volatility. All we can do is let you know that prices themselves are not justifying a negative reprice.

Here are the Reuters bullets for now, more to follow:

RTRS - FED SAYS WILL PURCHASE ADDITIONAL AGENCY MBS AT A PACE OF $40 BLN A MONTH

RTRS - FED SAYS WILL CONTINUE MBS BUYING, UNDERTAKE ADDITIONAL ASSET PURCHASES, USE OTHER POLICY TOOLS UNTIL LABOR MARKET OUTLOOK IMPROVES SUBSTANTIALLY

RTRS - FED SAYS MBS AND OPERATION TWIST PURCHASES WILL INCREASE HOLDINGS OF LONGER TERM SECURITIES BY ABOUT $85 BLN EACH MONTH THROUGH OF YEAR

RTRS - FED SAYS TO CONTINUE OPERATION TWIST TILL END OF YEAR

RTRS - FED SAYS TO KEEP RATES EXCEPTIONALLY LOW AT LEAST THROUGH MID 2015

RTRS - FED SAYS CONCERNED WITHOUT FURTHER POLICY ACCOMMODATION, GROWTH MAY NOT BE STRONG ENOUGH TO GENERATE SUSTAINED IMPROVEMENT IN LABOR MARKETS

RTRS - FED SAYS THESE ACTIONS SHOULD PUT DOWNWARD PRESSURE ON LONGER-TERM INTEREST RATES, SUPPORT MORTGAGE MARKETS, MAKE FINANCIAL CONDITIONS MORE ACCOMMODATIVE

RTRS - FED SAYS ECONOMIC ACTIVITY HAS CONTINUED TO EXPAND AT A MODERATE PACE IN RECENT MONTHS

RTRS - FED SAYS MAINTAINING ADDITIONAL POLICY OF REINVESTING PRINCIPAL PAYMENTS OF AGENCY DEBT AND AGENCY MBS IN AGENCY MBS

RTRS - FED SAYS KEEPS FED FUNDS BENCHMARK INTEREST RATE TARGET AT ZERO TO 0.25 PCT

RTRS - FED VOTE IN FAVOR OF POLICY WAS 11-1; LACKER DISSENTED, OPPOSING ADDITIONAL ASSET PURCHASES AND DESCRIPTION OF TIME PERIOD FOR LOW INTEREST RATES

RTRS - FED SAYS GROWTH IN EMPLOYMENT HAS BEEN SLOW AND JOBLESS RATE REMAINS ELEVATED; LONGER TERM INFLATION EXPECTATIONS HAVE REMAINED STABLE

The 30yr Bond Auction, understandably less interesting as it fell a mere hour before the FOMC Announcement, was still enough to elicit a courtesy nod from bond markets. All this amounts to, however, is a few ticks of positivity in Fannie 3.0s, essentially bringing them in line with their highs of the day. Still... we'll take it...

As for the auction itself, it was a pretty good one with a "stop through" (read more on auction jargon HERE if needed) of 1.1 bps and a slightly higher than average Bid-to-cover at 2.68 vs 2.64 for the last 4 re-openings.

We feel like that's a pretty good showing for the long bond on a day with so much at stake, and without any sort of major concession being priced in ahead of the auction. As such, it's been good for the minor adjustment into better territory, but naturally, any momentum created by the FOMC release will completely trump this post-auction trading. Think of this as an opening act that happened to be surprisingly entertaining, whereas the main event has yet to begin.