MBS Live Day Ahead: Fed in Focus Despite Predictable Outcome

Wednesday's Fed Announcement is one of the best-telegraphed in Fed history.  Multiple speakers--including Yellen herself--have all but promised that the Fed will begin tapering its balance sheet reinvestments at this meeting.  That means they'll be buying fewer Treasuries and MBS--an ostensible net-negative for bond markets and a source of upward pressure for rates.  

The thing is, the Fed has been talking about this balance sheet business for so long and with such specificity that there's not much of a surprise left for financial markets to price in.  They've even gone so far as to explicitly map out the particulars of the plan just so markets can specifically quantify the impact.  That roadmap came out at the June meeting, and they've used the intervening time to hammer home the point that it will go into effect in September.  All that's left is to make it official.

Because of that, there doesn't need to be any major market reaction to the confirmation of that which is already known.  Indeed, if the market reaction were strictly limited to the balance sheet plan, this week's meeting might be a snoozer.  It's the other facets of the announcement that are worthy of attention.  These include the Fed's economic projections (the "dots" that show the anticipated rate hike path) and the press conference with Yellen (which will give her an opportunity to talk about the pace at which the balance sheet tapering plan might evolve).

While the Fed is hoping markets don't much care about the the balance sheet plan, they'll never be able to stop bonds from keeping tabs on rate hike expectations.  Case in point, the following chart overlays 10yr Treasury yields with December Fed Funds Futures.  I took the liberty of inverting the futures line because normally "higher" = less likely to hike.  This way the rate hike likelihood corresponds to higher rates on the charted line.

That chart was snapped last Friday and bonds have weakened just a bit in the overnight session.  The big question over the next 2 and half days is whether yields can continue to treat 2.22% as a technical ceiling.  If they do, and if the takeaway from Fed day is positive, the chart would begin looking very bond-friendly in short order.  If the Fed hurts, a bigger break above 2.22% would suggest additional upward momentum through the end of the week.

Aside from the Fed, data isn't necessarily sparse.  It's just relatively far less consequential.  There is no data on Friday, and apart from Thursday's Philly Fed Index, the rest of the bigger reports are focused on the Housing Market.  While that's interesting for us mortgage types, these aren't the biggest market movers.