MBS Live Day Ahead: Rattled by Draghi, Traders Wait For Yellen

Members of the FOMC are constantly giving speeches and making appearances at various events.  The only exception would be the "blackout period" where Fed speakers refrain from commenting on monetary policy in the week leading up to an official policy announcement.  Apart from that, there are typically more than enough Fed sound bytes floating around to sate the desires of Fed prognosticators. 

Seemingly overnight, several Fed members have either changed their tune or have simply ramped up their dovishness.  That's a kitchen-sink term for a set of policy beliefs that's generally bond-friendly.  The most recent shift has been for Fed members to acknowledge the stubbornness of inflation and for some to suggest that further policy tightening isn't even justified at the moment.  Others have taken a slightly different approach by saying the Fed can stop hiking but should start reducing its balance sheet reinvestments (which incidentally still cover all new top tier origination). 

Markets take different Fed speakers more seriously than others.  While we have heard from Dudley recently (one of the top 3 at the Fed), it's been the other Fed members that have been more willing to shift their tone in recent weeks.  Markets are now waiting to see if there's a similar shift in tone from Fed Chair Yellen at a conference this afternoon in London.  This isn't an important event in and of itself, but bond markets are likely going to move in whatever direction ends up being implied by Yellen's comments.

Unfortunately, we're starting the day at a disadvantage because Yellen's European counterpart did some tune-changing of his own in the overnight session (covered in this alert on MBS Live).

From a technical perspective, the overnight weakness returns bonds right to "the fence" in the middle of recent momentum.  That means that any additional pressure today (whether Yellen-induced or otherwise) runs the risk of prompting additional weakness in  the coming days.