MBS RECAP: Farewell To Calendar Verbiage In Fed Policy

MBS Pricing Snapshot

MBS have moved back toward their lows after holding onto a supportive ledge of prices at 104-25 for the past hour. The move lower hasn't been sharp (currently 104-22), but it does leave the door open for reprice risk into the close. Additionally, it unwinds the previous hope that MBS would bounce back into morning range.

It hasn't been the fast and triumphant bounce back needed in order to avert a fair amount of negative reprices, but MBS have ground back within 2 ticks of unchanged as Bernanke begins his press conference. 10yr yields fought off a break above 1.7, but neither have they been eager to return below 1.68.

Reprice risk is less developed at these levels though not absent.

R.I.P. "Late 2015..."

As far as extending asset purchases in longer maturity US Treasuries, the Fed did exactly as-expected and kept the monthly amount at $45 bln. But the shocker is that the FOMC included monetary policy THRESHOLDS in the actual Announcement itself, as opposed to simply letting Bernanke discuss their potential future inclusion during this afternoon's press conference.

This is a big deal because it REMOVES the "late 2015" verbiage from the Statement and replaces it with the moving target of 6.5 percent unemployment, as well as other conditions that the committee leaves to door open to consider in the future. Additionally, the Treasury buying is not longer scheduled for a set amount of time, but open-ended, based on economic conditions.

MBS have bounced back fairly well from the initial knee-jerk, after Treasuries found support at the same highs seen in late November (just over 1.69). That said, 10yr yields have just revisited those highs and may be breaking through. We're not likely to see a big, confirmed break into higher yields without the remaining FOMC events today also having a negative impact, but it should keep the pressure on MBS for now. Negative reprices are still a risk unless we bounce HARD back in the other direction, and SOON.

Fannie 3.0s are currently 4 ticks weaker on the day at 104-26 and 10yr yields are about 5bps higher at 1.6919.

Fannie 3.0s down 8 ticks now. Negative Reprices Possible. More to Follow...

As expected, the 10yr Treasury auction didn't pack its traditional level of market-moving punch with the relatively much more important FOMC events looming in the near future. The auction results provided a good opportunity to confirm that. Reason being: the auction was strong, with only slightly below average bid-to-cover, but strong direct bidding and a substantially lower-than-expected yield. Under normal circumstances, such results would have resulted in a more marked shift into rally mode for 10's.

And while we have definitely seen a reaction in 10yr yields, it's better characterized as "contained" instead of "rally mode." 10's had been moving slightly higher this morning, building in a concession for the auction and any unpalatable eventualities from the FOMC Statement. Bottom line, the auction was palatable, and just we've simply gotten an adjustment to slightly lower yields, but no follow through rally. Pretty scripted movement.

The translation for MBS has been positive but also contained with Fannie 3.0s simply returning to their previous range of the morning after following 10's lower for the pre-auction concession--now back to 104-30, 1 tick higher on the day.