MBS RECAP: What's up with the Weird Market Reaction to FOMC?

By: Matthew Graham

Today's FOMC Announcement resulted in one of the strangest market reactions in recent memory.  Explanations for the various movements abound, and most of them unfortunately contradict each other. 

For instance, one of the popular conclusions is that the Fed's mention of international issues means they won't be able to remove accommodation as quickly because the international economy is in rough shape, thus the bond market rally.  Up to that point in the logic, things are fine, but then consider the massive stock market sell-off and it falls apart.  More Fed accommodation should be positive for stocks.  So this theory falls apart there.

The next theory argued that the statement was hawkish (meaning it hearkened less accommodation than conditions might suggest).  This one would explain the stock market weakness, but it's harder to get to the bond market strength.  Harder... but still sort of possible.  It could be done by leaning heavily on the currency implications of a stronger dollar hurting stocks and creating demand for bonds (buy bonds in today's dollars and earn back an appreciating currency over time).  The big problem here is that there was too much disconnection between stocks, bonds, and currency trading levels.

A variant of that argument begins to hone in on what I think is the most plausible explanation.  It too argues that the statement was hawkish due to the Fed seemingly not backing down from the rate hike time table quickly enough.  That part is wide open to interpretation, but the conclusion would hold that stocks would take a big hit.  From there, we could make the leap to bond markets picking up some "asset allocation" flows (i.e. money managers selling stocks to buy bonds).

Whether it was motivated by stocks or not, the critical ingredients in this afternoon's strength were simply a few big trades that forced other traders onto the same boat.  This wouldn't normally be quite as possible after a Fed Announcement, but keep in mind the level of participation is low this week and expectations for a boring FOMC didn't help.  Volume was just a bit better than HALF of what it was back when markets were trading important issues like the European bond-buying court ruling on January 14th.  Even compared to the average over the past 10 sessions, today was about 60%.   Ultimately, it's that kind of light participation that's necessary to grease the skids for the kind of weirdly strong movement we saw this afternoon. 


MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
MBS
FNMA 3.0
103-03 : +0-16
FNMA 3.5
105-14 : +0-11
FNMA 4.0
106-30 : +0-06
Treasuries
2 YR
0.4650 : -0.0500
10 YR
1.7220 : -0.1060
30 YR
2.2910 : -0.1080
Pricing as of 1/28/15 4:51PMEST

Today's Reprice Alerts and Updates
A recap of Alerts and Updates provided to MBS Live subscribers.
2:21PM  :  Bond Markets React Favorably to "Head in Sand" Fed Statement
9:29AM  :  Pre-School Painting or Pre-FOMC Consolidation. Same Difference

MBS Live Chat Highlights
A recap of featured comments from the Live Discussion on the MBS Live Dashboard.
Steve Chizmadia  :  "Secondary will want to see these levels hold before improving rate sheets"
Tim McNerney  :  "where's the reprice love?"
John Tassios  :  "They painted themselves in a corner and signaled they will raise, but they will realize quickly in 2016 it was mistake and take it back"
Oliver Orlicki  :  "They are not going to raise rates this year"
Matthew Graham  :  "as expected"
Matthew Graham  :  "RTRS- FED STATEMENT NO LONGER CONTAINS “CONSIDERABLE TIME” PHRASE"
Matthew Graham  :  "RTRS - FED REPEATS TIMING OF RATE HIKES CONTINUES TO DEPEND ON INCOMING INFORMATION, PROGRESS TOWARD INFLATION, EMPLOYMENT OBJECTIVES"
Matthew Graham  :  "RTRS - FED SAYS LABOR MARKET SLACK CONTINUES TO DIMINISH"
Matthew Graham  :  "RTRS - FED SAYS SOME MARKET-BASED MEASURES OF INFLATION COMPENSATION HAVE DECLINED SUBSTANTIALLY, WHILE SURVEY-BASED MEASURES OF LONGER-TERM INFLATION EXPECTATIONS HAVE REMAINED STABLE"
Matthew Graham  :  "RTRS- FED SAYS INFLATION HAS DECLINED AND MAY DECLINE FURTHER, BUT SHOULD INCREASE OVER THE MEDIUM TERM AS LABOR MARKET IMPROVES AND TEMPORARY EFFECTS OF LOW ENERGY PRICES FADE"
Matthew Graham  :  "RTRS- FED REPEATS CAN BE "PATIENT" IN BEGINNING TO NORMALIZE STANCE OF MONETARY POLICY"