MBS Week Ahead: Big Fed Week And Street Hockey With Bunds

This is one of the biggest weeks of the year.  The main reason for that is Wednesday's series of FOMC events.  At every other meeting, the Fed adds two important ingredients to their regular policy announcement.  The first is the updated economic projections.  These are the forecasts made by Fed members on things like the Fed Funds Rate over time, GDP, and Employment.  Realistically, the rate outlook is the star of that show, and the so-called "dots" (the Fed's website provides a dot plot of where the votes come in) typically move markets when they're materially different from the previous version. They're released at the same time as the announcement itself.

As far as the announcement is concerned, there is almost no chance that the Fed will make any material changes from the previous version, although they have technically left the door open to hiking rates at any meeting after April's.  It's unlikely that they would change any verbiage to better telegraph their rate hike intentions, especially considering the extra information that comes out this time.

The second key ingredient--and the biggest reason the Fed need not overdo it in the Announcement itself--is Yellen's press conference that follows 30 minutes after the Announcement is released.  The Fed can rest assured that Yellen will field at least one question on rate hike timing. 

The last Fed meeting didn't have the press conference, thus leaving the announcement more prone to inference from market participants.  In that announcement, the Fed removed the sentence that said a rate hike was unlikely at the April meeting (obviously, considering it WAS the April meeting and the Fed didn't hike).  Some saw this as an indication that the potential for a rate hike had "gone live." 

Making things more interesting is the European connection.  After that April Fed meeting, German Bunds took off like die fledermaus out of whatever kind of hölle fledermäuse normally take off from (if you got that without google translate, cheers).  It's hard to say whether that was a reaction to the FOMC announcement or to ongoing European events and trading. 

This week is interesting for the same reason.  Greek drama--while not the markets' biggest concern--is nonetheless coming to a head.  Extending and pretending is to be expected, but a definitive deal would be a surprise that likely matters enough to hurt German Bunds, Treasuries, and to a smaller extent, MBS. 

At the same time, German Bunds are near an important 'gap' between May's high yields and June's low yields.  When bond markets cross (or "fill") these sorts of gaps, it can often be the cue for traders to reload on bets that rates move higher.  Somewhat less frequently, it's a technical cue to get back to buying.  Whichever side wins, it will provide strong commentary on underlying momentum.