MBS Live Recap: Fed Comments Tank Bonds in 9th Inning

By: Matthew Graham •

Treasuries and MBS made it almost all the way through the day with very little drama.  There were some ups and downs, but by 4pm, trading levels were very close to 'unchanged' on the day.  Then newswires hit from NY Fed President Dudley:

  • RTRS - FED'S DUDLEY: RATE HIKE LIKELY IN 'RELATIVELY NEAR FUTURE'
  • RTRS - FED'S DUDLEY: EXPECTS TO CONTINUE TO REMOVE ACCOMMODATION
  • RTRS - FED'S DUDLEY: CASE FOR TIGHTENING IS NOW A LOT MORE COMPELLING -CNN
  • RTRS - FED'S DUDLEY: LIKELY TO GET FISCAL STIMULUS; RISKS TO OUTLOOK LIKELY TILTED TO UPSIDE

It's one thing for regional Fed presidents to pontificate on rate hike risks, but Dudley is in another league.  Along with Yellen and Vice Chair Fischer, Dudley is one of the "big three" voices at the Fed that matters most.  This normally isn't an issue because Dudley doesn't give as many speeches as other members.  When he does, he tends to strike a centrist tone.

Today's comments were certainly not taken as "centrist."  Markets interpreted this to mean that big three are leaning toward a March rate hike.  Fed Funds Futures were already pricing in a decent chance of that, but they leapt even higher on the Dudley wires.  

The damage was most severe for 2-5yr Treasuries, but 10yr yields still took a 3bp hit.  Fannie 3.5 MBS lost nearly a quarter point almost instantly.  Lenders who didn't reprice for the worse only abstained if they don't typically reprice that late in the day.  They'll be starting tomorrow with a pricing handicap.  

Of course tomorrow morning could go BIG in either direction, given the hype surrounding tonight's Trump speech to congress.