Fed Abstains From Bond-Buying Change, But Powell Delivers

Speculation about whether or not the Fed would make a bond buying change at the December meeting is now behind us.  The Fed changed almost nothing in its policy statement.  In fact, the changes it made were arguably bond-friendly.  Nonetheless bonds sold off at 2pm due to the absence of the any change to the bond buying average maturity.  Weakness was contained and buyers came charging back after Powell laid out some tough talk for inflation hawks in his press conference (paraphrasing: the 70s are over and it's OK that the Fed is creating 10s of billions of dollars a month in new money).  By the close, bonds were close enough to unchanged to call Fed day a wash.

Econ Data / Events

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

  • Retail Sales -1.1 vs -0.3 f'cast, -0.1 prev

  • Markit PMI 55.7 vs 58.6 previously

  • NAHB Builder Confidence 86 vs 88 f'cast, 90 prev

Market Movement Recap
08:14 AM

EU bonds sharply weaker overnight on improved brexit outlook.  US yields followed.  10yr started the domestic session up 2.4bps but are now up 3.2 bps and climbing following rumors of an imminent stimulus bill.  MBS are down an eighth of a point.

12:20 PM

Weakness accelerated in the first hour of trading, but reversed course when stocks opened.  The corrective rally carried Treasuries to their best levels by 11am, but MBS were already fading by 10:20am (a direct result of the conclusion of the Fed's AM buying window, but not necessarily anything major or exciting).  Both sides of the market are still most interested in the Fed coming up at 2pm ET.

02:23 PM

First reaction to Fed was an abrupt move toward higher yields and lower prices.  This has everything to do with the Fed forgoing a "WAM extension" (i.e. not increasing weighted average maturities in its bond buying portfolio).  The statement itself was bond-friendly.  Perhaps that's why the sell-off is thus-far limited relative to what it might have been.  10yr up 3.5bps at .946 and not even back to the highs of the day.  UMBS 1.5 down 6 ticks  (.19) at 100-21 (100.66).

02:42 PM

Nice bounce back after initial post-Fed weakness--especially for MBS which are now easily back into the upper middle of the day's trading range.  Powell just started taking questions.  The final fate of the day's bond momentum is still up for grabs, but the thesis so far remains: "it could have been a lot worse."

04:20 PM

With less than an hour left and with the 3pm CME close already in the books, it's safe to say bonds did a great job of holding onto the late-day gains.  Trading levels are right in line with pre-Fed levels on all fronts.