MBS RECAP: Calmly Basking in Post-Fed Glow

By: Matthew Graham •

Today gave markets a chance to continue reflecting on the realities of yesterday's FOMC Announcement.  The Fed broke new ground by including the global macroeconomic risks to inflation.  In other words, the Fed might have hiked if they didn't see global developments posing a problem for inflation.  The takeaway is that the Fed can no longer say "we expect inflation to pick back up," without relying on the global macroeconomy to similarly pick back up.  That's much more "picking back up" than they were hoping to see when it was just about domestic inflation!

Of course the logic is that the global economy is preventing domestic inflation, and that can make some sense.  But whether it does or it doesn't, the Fed is essentially saying "we don't have enough inflation and we're not sure when we're going to get it or where it's going to come from."  This is a far more economically bearish outlook than most anyone had expected from the Fed. 

Overseas markets didn't have a chance to respond to that bearish message  yesterday (because they were closed by Fed time).  When they fired up today, it was clear the message had been received.  Major stock indices (more so from developed economies) sank across the board and bond yields fell sharply.  This gave domestic markets an opportunity to keep rallying, albeit not nearly as sharply as yesterday.  10's ended the day down nearly 6bps and MBS gained roughly a quarter of a point.   The movement was calm and collected all day long--like bonds knew where they wanted to be and where they were going. 

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
101-01 : +0-08
FNMA 3.5
104-04 : +0-07
FNMA 4.0
106-20 : +0-04
Treasuries
2 YR
0.6780 : -0.0080
10 YR
2.1340 : -0.0580
30 YR
2.9340 : -0.0750
Pricing as of 9/18/15 5:42PMEST
MBS Live Chat Highlights
A recap of featured comments from the Live Discussion on the MBS Live Dashboard.
Matthew Graham  :  "Unless news comes out that the water pitchers at the Fed meeting were spiked with something potent and mind-altering, I would rather be a bond bull vs bear at the moment. Expanding the frame of reference to include global macroeconomic risks to domestic inflation outlook as grounds for a policy decision is a major game-changer. They're basically saying they've given up on expecting inflation to pick up because of the global economy. That's not the sort of thing that results in a mere 2-day knee-jerk. I don't even think the notion has been fully appreciated yet. And just wait until we see if stocks really start showing their lack of appreciation. "
Matthew Graham  :  "valid. It wouldn't be an urgent lock opportunity, but neither would it be easily faulted"
Thomas Nelson  :  "Depends if a little worse on Monday morning is a deal breaker. One day late is better than 7 days early"
Hugh W. Page  :  "If I had one ready to lock it would be locked"
Christopher Stevens  :  "hit it on the head MG"
Matthew Graham  :  "locking any time at the lowest rates in 4 months though... "
Dominick Cordone  :  "locking on a Friday into a rally? hmmm...."
Christopher Stevens  :  "AP- I had quite a few locks come across the desk today"
Andy Pada, Jr.  :  "who locked in today"
Brent Borcherding  :  "I think you're 100% correct to state that the least desired environment is one with runaway inflation. However, considering the fact that we're 1 1/2 years into the Fed desperately wanting to raise rates and still not being able to justify it....I'd disagree with you that anyone feels strongly that inflation is soon to rise. In fact, I think they are all believing quite the opposite."
Sung Kim  :  "Fed messed up. But the screw up will be in our favor. I changed my mind. "
Matthew Graham  :  "If they were genuinely worried about runaway inflation, I think they would have hiked. Instead, I think they're far more worried about a persistent absence of inflation. Long bonds traded "the message," in other words, while short bonds traded the policy."
Matthew Graham  :  "yes, Conventional thing JB"
Jason Anker  :  "i'm just not excited about current bond levels, not overly optimistic about a "big rally" looming and certainly do not want to be in an environment where the fed is raising by 50bps to combat run-away inflation."
Jon Bodan  :  "hey all, I think I'm having a brainfart on something. I know that FHA foreclosure is 3yrs from date FC deed was filed. However, I want to say that I read that if the property was in a discharged Ch7 that was more than 2 years ago, it went off the BK discharge date and not the FC deed date. Am I confusing that with some other Conventional guidance or something?"