Fed Stays Course on Policy Tightening; Calls Out MBS

As expected, the Fed announcement did nothing to alter the outlook for impending rate hikes starting in March and balance sheet normalization starting some time after rate hikes.  The only somewhat surprising development was a specific mention of the Treasury vs MBS balance sheet percentage (in a separate document on normalization).  It put into writing a concept shared a few times by a few Fed speakers regarding getting back to a Treasury-only portfolio.  That's very bad news for MBS even if not entirely unexpected.  It remains to be seen how hard this will hit MBS in the coming hours and days.

Econ Data / Events

  • Fed MBS Buying 10am, 11:30am, 1pm

  • FHFA Home Prices Nov y/y.............. 17.5 vs 17.4 prev
    Case Shiller Home Prices Nov y/y..... 18.8 vs 18.5 prev

Market Movement Recap
08:51 AM

Bonds were exceptionally flat overnight--especially in the context of heightened recent volatility.  Bonds not responding much to 1.5% gain in stocks.  10yr unchanged at 1.778 and UMBS 3.0 coupons are up 2 ticks (0.06) at 102-11 (102.34).

12:21 PM

Still mostly sideways ahead of the Fed.  Some volatility at 9:30am NYSE open and following Bank of Canada announcement.  MBS up 1 tick (0.03) and 10yr yields up less than 1bp at 1.783.

02:23 PM

Massive illiquidity in MBS following Fed announcement (due to this).  10yr yields up 3bps at 1.806.  MBS are anyone's guess, but they're definitely not stronger (anywhere between an eighth and a quarter point weaker by the time we factor out illiquidity, but prices could change by the time liquidity returns).

02:59 PM

Powell doesn't care about the stock sell-off.  He's bullish on the economy and forceful on tightening monetary policy.  Bonds are reacting accordingly with 10s up 7+ bps at 1.846 and MBS down 3/8ths of a point (liquidity returning).