MBS RECAP: ECB Takes Toll, Sideways From There Despite Auction-Related Head Fake

MBS Pricing Snapshot

FOMC voters talk about adjusting the QE outlook and bond markets quickly revisit painful memories from last week's FOMC Minutes. St. Lousis Fed's Bullard will be an FOMC Voter this year and he leans a bit hawkish (meaning he's less in favor of quantitative easing and any other Fed policy that could stoke inflationary fires at its core, the whole "hawks/doves" nomenclature centers on inflation. Ipso facto, a "hawk" is essentially an "inflation hawk") though is significantly more balanced in his pros/cons assessment of Fed policy than, say, the outbound 2012 voter Jeffrey Lacker.

Because Bullard is a more central sort of hawk, markets are more interested in his speeches (or they should be anyway), as he is closer to the average FOMC Voter in terms policy stance. And so it was that bond prices briefly pulled back after a Bullard speech earlier. Some of his comments stirred up painful memories of last week's FOMC Minutes just now, though markets have already mostly recovered.

To reiterate our stance on the question of what last week meant (because it seems like it needs to be reiterated), we don't think the FOMC Minutes suggested an accelerated time frame for QE. They did, however, DECREASE the level of certainty and comfort regarding the seamless continuation of bond buying. The Fed has been crystal clear in saying that bond buying will continue for a short while AFTER it's no longer needed. In other words, they want to make sure the car is running under it's own power before pulling off the jumper cables. Seems sensible, and even the inflation hawks agree (mostly), but with the big distinction being that inflationary risks are a bigger concern for them.

The bottom line is that the hawks don't much care for QE, even if they acquiesce (mostly) to it being a necessary evil. For such reasons, folks like Bullard are clear in pointing out that QE could "taper" depending on inbound macroeconomic data.

This turned out to have the biggest impact on markets of any instance of Fed-speak since last week's Minutes. It wasn't much, and the course was possibly reversing anyway, but rates did come under some pressure after Bullard. 10's simply moved back to the mid point of the pre-auction range trade and MBS shed a few ticks but have since bounced back a bit. Sideways grinding into the close, but no legs on a post-auction rally.

The 30yr Auction was stronger-than-expected in terms of the awarded yield (3.070 vs a 3.088 1pm "when-issued" yield). When-issued or "WI" can be thought of as the "expected" stopping yield for the auction. Additionally, the ratio of dollars bid vs the amount of dollars auctioned was 2.77, moderately higher than the recent average of 2.60. (More on auction jargon HERE).

All things considered, it was a reasonably strong auction, and it had to be in order to prevent further weakness in bond markets. Even with the good result, 10 Yr Treasuries are still struggling to make it back into yesterday's range and MBS have stalled out right at their highs of the day.

Fannie 3.0s are up roughly 4 ticks from their pre-auction levels (104-14 vs 104-10), which is definitely better than sharp stick in the eye, but not necessarily good enough for more than few lenders to be considering a positive reprice. In terms of 10yr yields, the week is shaping up to be a sideways grind between 1.91 and 1.85 with auction helping us get back to the center of that range, but not to break through it. 10's are currently up a few bps on the day at 1.88, but off their pre-auction highs just over 1.90.