MBS RECAP: Defensive Repositioning And Lots Of Locking Ahead Of NFP

MBS Pricing Snapshot

Committee members saw the information received over the intermeeting period as suggesting that economic activity had continued to expand at a moderate pace in recent months. However, growth in employment had been slow, and almost all members saw the unemployment rate as still elevated relative to levels that they viewed as consistent with the Committee's mandate. Members generally judged that without additional policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Moreover, while the sovereign and banking crisis in Europe had eased some recently, members still saw strains in global financial conditions as posing significant downside risks to the economic outlook. The possibility of a larger-than-expected fiscal tightening in the United States and slower global growth were also seen as downside risks. Inflation had been subdued, even though the prices of some key commodities had increased recently. Members generally continued to anticipate that, with longer-term inflation expectations stable and given the existing slack in resource utilization, inflation over the medium term would run at or below the Committee's longer-run objective of 2 percent.

Consensus Forecast Experiment:
In light of the discussion at the previous FOMC meeting, the subcommittee on communications developed a second experimental exercise intended to shed light on the feasibility and desirability of constructing an FOMC consensus forecast. At this meeting, participants discussed possible formulations of the monetary policy assumptions on which to condition an FOMC consensus forecast and alternative approaches for participants to express their endorsement of the consensus forecast. In conclusion, participants agreed to have a broad discussion of the experiences gathered from the two experimental exercises in conjunction with the October FOMC meeting.

Treasury Futures volume spiked at 1:36pm resulting in a mini wave of selling washing over the rest of the fixed-income complex. MBS have taken a hit as well and Fannie 3.0s are down 10 ticks on the day now at 105-15. This is significantly more dangerous territory for negative reprice risk than the earlier grind around 105-19 to 105-20.

We're not seeing any headline "cause and effect" with the volume spike, but will update you if we see anything to suggest it was something other than a large tradeflow.

The trend for MBS prices since 11am has taken a turn for the worse. Fannie 3.0s had a nice move up from 105-19 lows to 105-24 highs from 10am to 11am, but have since fallen back to break through those lows by 1 tick.

This gives us our 4 tick (or .125) change from the predominant prices during rate sheet time leading up to 10am, and thus increases the negative reprice risks. As is typically the case with our first negative alert of the day, this is a heads-up that we've reached the precipice of reprice risk, where a bounce back higher will likely keep most lenders from repricing, while holding steady or falling in price will incrementally increase risks.