MBS RECAP: Big Bounce Higher Ahead of Fed

MBS Pricing Snapshot

After Fed's Bullard was out earlier with dovish comments, NY Fed Pres William Dudley has now hit the wires with more of the same, and with some MBS-specifics to boot. Fannie 3.0s are up 13 ticks currently at 103-23 and 10's are down around 3bps on the day to 1.937

MBS are reaping greater rewards due not only to spread technicals relating to 10's run toward (and away from) 2%, but also due to Dudley's comments. The NY Fed President suggested that the Fed could decide not to sell MBS when it comes time to reduce its holdings and that this would not only avoid shocks to the market, but also prevent some risk of balance sheet loss.

The fairly simple conclusion concerns supply and demand. If we know the Fed has "lots of MBS," and that they might or might not "sell" in the future, any suggestion that they might "not sell," tips the scales in favor of "less supply" over some indeterminately long time scale, thus having a mildly salubrious effect on MBS. But BE SURE TO NOTE: that positivity is RELATIVE to the rest of the bond market and in that regard, 10yr yields just bounced after breaking below 1.93 (already back up to 1.942). So we may simply be left with MBS prices that give up less if this marks a turning point (or even just a "leveling off") in today's rally. Too soon to tell, but volume and flows make the high 1.92's look like a significant short term resistance level.

(a rare positive "alert"):
Fannie 3.0s are now up 7 ticks on the day to 102-17 after hanging on to the bounce that was potentially developing during the last update at 10:15am. After the Fed's daily Treasury buying operation (aka: POMO for "permanent open market operation), yields only rose a bit more as remaining inventory was sold. Volume went dead after that and big buying came in at 11:24am in Treasuries.

That's been good for just over a bp of improvement in 10's and MBS have followed it up with several ticks more. Keep in mind that, as 10's approach 2%, Fannie 3.0s have a tendency to get especially queasy. When 10's show resilience in moving lower in this high 1.9's territory, MBS perk up noticeably. We're seeing that now, and may see reprices from some 'early crowd" lenders.

Treasuries DID, however, pause to digest Bullard's comments at 11:30, which were surprisingly dovish. Bullard said that QE is the best way to way to go when a central bank has 'near zero' rates, but this was more advice for Europe than it was a statement about current policy. It's almost as if markets were double checking to make sure there wasn't any hidden, bearish clue in Bullard's speech. 10's held at 1.96, and not even 1 minute ago, broke lower. Things are looking up for MBS for now. 1.96 is now a pivot point that we'll hope proves supportive if yields head higher.