What Exactly Might The Fed Do Tomorrow and Why Should We Care?

MBS suffered, somewhat, from supply/demand issues immediately following the Fed's 11:30-11:50am buying operation today.  Prices rebounded by the close and were never catastrophically lower in the first place.  With the exception of a surprise stimulus headline or a huge departure from expectations in Retail Sales tomorrow morning, focus now shifts squarely to tomorrow's Fed announcement.  What's at stake?  The Fed may or may not adjust the weighted-average maturity (WAM) of its bond buying portfolio.  If they do, it would likely give Treasuries a friendly boost.  Vice versa if they don't.  MBS would see a smaller version of the Treasury move in either case.

Econ Data / Events

  • 20min of Fed 30yr UMBS Buying 10am, 1130am (M-F) and 1pm (T-Th)

  • NY Fed Manufacturing 4.9 vs 6.9 f'cast, 6.3 prev

  • Import Prices 0.1 v 0.3 f'cast, -0.1 prev

Market Movement Recap
08:21 AM

Bonds were modestly stronger to start the overnight session and then weakened slightly during European hours.  There wasn't enough movement in either direction to justify a search for market movers.  Same story post-econ data just now.  10yr yield is up half a bp at .903 and UMBS 1.5s are down 2 ticks (0.06) at 100-28 (100.875).

12:20 PM

Modest amount of MBS-specific weakness + modest amount of illiquidity = a moderate but fairly abrupt drop in MBS prices.  Treasuries haven't experienced similar weakness because there's no broad market mover in play.  Rather, MBS weakness is almost certainly a result of the Fed's most recent buying operation (which ended right when the weakness began, and which likely favored MBS 1.5 coupons over 2.0s).

03:36 PM

Losses accelerated heading into the 2pm hour as Treasuries joined in the bond-selling spree.  10yr yields were as high as .925 and 1.5 UMBS were as much as a quarter of a point lower on the day.  They've since recovered an eighth of a point.