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MBS RECAP: Farewell To Calendar Verbiage In Fed Policy
Posted to: MBS Commentary
Wednesday, December 12, 2012 4:05 PM

Forward this email:  Send a copy of this story to someone you know that may want to read it.

MBS Live: MBS Afternoon Market Summary
Today's FOMC Announcement brought some interesting changes to way the Fed will be communicating monetary policy going forward.  The most notable change is the the previous verbiage referencing exceptionally low rates through particular calendar time frames that debuted over a year ago has been replaced by thresholds in unemployment and inflation.  The thresholds were certainly on the table and FOMC members had said that they were actively being discussed.  But their fast-track into December's policy statement wasn't widely expected.  It could be argued (quite well, actually), that the "specified date" method of conveying policy was not a sustainable model the closer we got to the date itself (because "late 2015" may change several times before we get there). 

In this sense, policy thresholds are superior, but like other things that are potentially ahead of their time, this change might seem like an overextended effort to "fix or replace something," and thus end up doing more harm than good.  There's no way to know if that will be the case, but "more harm than good" is how both sides of the market treated the news today.  Let's not over-complicate it though.  Moving from a "date" to a "threshold" is necessarily LESS CERTAIN at first because the date doesn't move and the threshold does.  We sacrifice an increase in near term certainty as to how/when the Fed will make policy changes, for what we hope will be a increase in longer term certainty.  Markets are justifiably pouting about the loss of near term certainty.
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
FNMA 3.0
104-23 : -0-07
FNMA 3.5
106-15 : -0-04
FNMA 4.0
107-00 : -0-03
FNMA 4.5
107-26 : -0-01
GNMA 3.0
106-05 : -0-06
GNMA 3.5
108-15 : -0-04
GNMA 4.0
109-07 : -0-05
GNMA 4.5
109-04 : -0-03
FHLMC 3.0
104-13 : -0-07
FHLMC 3.5
106-04 : -0-03
FHLMC 4.0
106-16 : -0-03
FHLMC 4.5
106-31 : -0-01
Pricing as of 4:05 PM EST
Afternoon Reprice Alerts and Updates
Below is a recap of instant Reprice Alerts and updates issued via email and text alert to MBS Live subscribers this afternoon.

3:57PM  :  ALERT ISSUED: Lingering Reprice Risk As Afternoon Support Breaks
MBS have moved back toward their lows after holding onto a supportive ledge of prices at 104-25 for the past hour. The move lower hasn't been sharp (currently 104-22), but it does leave the door open for reprice risk into the close. Additionally, it unwinds the previous hope that MBS would bounce back into morning range.
2:20PM  :  MBS Mostly Recovered As Bernanke Press Conference Starts
It hasn't been the fast and triumphant bounce back needed in order to avert a fair amount of negative reprices, but MBS have ground back within 2 ticks of unchanged as Bernanke begins his press conference. 10yr yields fought off a break above 1.7, but neither have they been eager to return below 1.68.

Reprice risk is less developed at these levels though not absent.
12:56PM  :  Bond Markets Coping With Loss Of Four Important Numbers
R.I.P. "Late 2015..."

As far as extending asset purchases in longer maturity US Treasuries, the Fed did exactly as-expected and kept the monthly amount at $45 bln. But the shocker is that the FOMC included monetary policy THRESHOLDS in the actual Announcement itself, as opposed to simply letting Bernanke discuss their potential future inclusion during this afternoon's press conference.

This is a big deal because it REMOVES the "late 2015" verbiage from the Statement and replaces it with the moving target of 6.5 percent unemployment, as well as other conditions that the committee leaves to door open to consider in the future. Additionally, the Treasury buying is not longer scheduled for a set amount of time, but open-ended, based on economic conditions.

MBS have bounced back fairly well from the initial knee-jerk, after Treasuries found support at the same highs seen in late November (just over 1.69). That said, 10yr yields have just revisited those highs and may be breaking through. We're not likely to see a big, confirmed break into higher yields without the remaining FOMC events today also having a negative impact, but it should keep the pressure on MBS for now. Negative reprices are still a risk unless we bounce HARD back in the other direction, and SOON.

Fannie 3.0s are currently 4 ticks weaker on the day at 104-26 and 10yr yields are about 5bps higher at 1.6919.
12:34PM  :  ALERT ISSUED: Bond Markets Selling Off Following FOMC Announcement
Fannie 3.0s down 8 ticks now. Negative Reprices Possible. More to Follow...
11:59AM  :  Strong 10yr Auction, But Bond Markets Stay Contained
As expected, the 10yr Treasury auction didn't pack its traditional level of market-moving punch with the relatively much more important FOMC events looming in the near future. The auction results provided a good opportunity to confirm that. Reason being: the auction was strong, with only slightly below average bid-to-cover, but strong direct bidding and a substantially lower-than-expected yield. Under normal circumstances, such results would have resulted in a more marked shift into rally mode for 10's.

And while we have definitely seen a reaction in 10yr yields, it's better characterized as "contained" instead of "rally mode." 10's had been moving slightly higher this morning, building in a concession for the auction and any unpalatable eventualities from the FOMC Statement. Bottom line, the auction was palatable, and just we've simply gotten an adjustment to slightly lower yields, but no follow through rally. Pretty scripted movement.

The translation for MBS has been positive but also contained with Fannie 3.0s simply returning to their previous range of the morning after following 10's lower for the pre-auction concession--now back to 104-30, 1 tick higher on the day.
Live Chat Featured Comments
A recap of the featured comments from the MBS Live Dashboard's Live Chat feature, utilized by hundreds of industry professionals each day.

Gus Floropoulos  :  "Well, at least we had a few hours b4 the rp's hit...thanks to the live streams and update provided through MBS Live!"
Matthew Graham  :  ""We don't expect 100% pass-through.""
Matthew Graham  :  ""Our analysis suggests it takes time.""
Matthew Graham  :  ""Reduction in MBS Yields is not being passed through" - Bernanke"
Matt Hodges  :  "REPRICE: 3:16 PM - Suntrust Worse"
Andrew Peterson  :  "REPRICE: 1:20 PM - Icon Wholesale Worse"
Nick Solis  :  "6 mos min and up to 2 yrs its the Mi's dsicretion with MGIC. funny how people dont disclose that to borrwers ie lenders and MI companies. "
Matt Sullivan  :  "my borrower refinacned though....your situation may be diffirent"
Matt Sullivan  :  "MH I have had PMI removed after 12 months...was told it was up to the underwriter though"
Jeff Anderson  :  " 2 year for conventional."
Matt Hodges  :  "MI question - i can't find any specific timeframes on removal. I have a client who intends on improving his new purchase and I've told him that he'll need 1-2 year minimum payments on MI before removal. Can anyone clarify the timeframe?"
Jim Leonard  :  "REPRICE: 1:09 PM - Sierra Pacific Worse"
Clayton Sandy  :  "REPRICE: 1:09 PM - Provident Funding Worse"
Victor Burek  :  "yep..lower participation rate"
Jason Wilborn  :  "Here is the issue with the Feds 6.5% hard target, that target can be achieved without real economic growth as we have seen"
Tom Bartlett  :  "they realized the unwinding of twist may need to happen sooner than late 2015 and needed to back off the firm commitment to keep spending grandchildrens future.It is great for us now but could cause major problems down the road with all the debt etc...I personally hope we can quit the artificial support sooner rather than later."
Matthew Graham  :  ""through late 2015" is gone. it was near the end before the long underlined section."
Matthew Graham  :  "http://www.mortgagenewsdaily.com/mortgage_rates/blog/286819.aspx"
Andy Pada  :  "so the language was to keep rates low until a certain date? What date was that?"
Matthew Graham  :  "but open-ended"
Christopher Stevens  :  "no thresholds on asset purchases though"
Matthew Graham  :  "as far as asset purchases, yes"
Brent Borcherding  :  "I would agree with that statement, AP."
Andy Pada  :  "not to minimize the change is criteria, but is everything else pretty much expected?"
Matthew Graham  :  "no idea, but late 2015 is late 2015 whereas thresholds are a moving target."
Christopher Stevens  :  "you think u/e will be below 6.5 before end of 2015"
Matthew Graham  :  "RIP "Late 2015""
Matthew Graham  :  "no. it's all about the change from DATE to THRESHOLDS"
Christopher Stevens  :  "perhaps they wanted that 45billion put into MBS's instead of more treasurys"
MMNJ  :  "prob a kneejerk.....we go back to flat in about an hour"
Kunal Khanna  :  "why the selloff?"
Matthew Graham  :  "RTRS- FED SAYS EXPECTS HIGHLY ACCOMMODATIVE POLICY WILL REMAIN APPROPRIATE FOR CONSIDERABLE TIME AFTER ASSET PURCHASE PROGRAM ENDS AND ECONOMY STRENGTHENS "
Matthew Graham  :  "RTRS- FED SAYS WILL ALSO CONSIDER OTHER DATA ON LABOR MARKET CONDITIONS, INFLATION EXPECTATIONS, FINANCIAL DEVELOPMENTS FOR POLICY DECISIONS "
Matthew Graham  :  "RTRS - FED-TO KEEP FED FUNDS 0-0.25 PCT AS LONG AS JOBLESS RATE ABOVE 6.5 PCT, 1-2 YEAR PROJECTED INFLATION NO MORE THAN 2.5 PCT, LONGER-TERM INFLATION EXPECTATIONS WELL ANCHORED "
Matthew Graham  :  "But THRESHOLDS?!"
Matthew Graham  :  "RTRS - FED SAYS WILL BUY LONGER-TERM TREASURY SECURITIES AT INITIAL PACE OF $45 BLN A MONTH AFTER ITS 'OPERATION TWIST' ENDS AT END OF YEAR "
Matthew Graham  :  "brace for impact"
Christopher Stevens  :  "just received this email "we will be revising our SRP schedules to more closely reflect the true economic value of servicing. With loans locked after Jan 1, you will see your SRP values decrease significantly. Our base pricing, however, will be increased to compensate for this reduction." "
Matthew Graham  :  "B+ considering the back-up heading into it. I wouldn't think the rally would extend too much because of that, but definitely helps hold ground heading into FOMC"
Matthew Graham  :  "RTRS- U.S. 9-YR 11-MO NOTES BID-TO-COVER RATIO 2.95, NON-COMP BIDS $19.95 MLN "
Matthew Graham  :  "RTRS - U.S. SELLS $21 BLN 9-YR 11-MO NOTES AT HIGH YIELD 1.652 PCT, AWARDS 84.32 PCT OF BIDS AT HIGH "
Matthew Graham  :  ""less consequential" I'd say, but not unimportant"
Victor Burek  :  "inconsequential?"
Matthew Graham  :  "10yr Auction coming up, recent average bid-to-cover is 3.20 for refundings and the 11:30 "when-issued" yield was 1.675."
Andy Pada  :  "in other news, don't we have an auction?"
Todd Crampton  :  "CR Yes you can omit them. Business net income already reflects the debt"
Caroline Roy  :  "can you omit an installment loan on a conv. purchase with 12 mo cancelled checks showing that the business pays it? or just on FHA?"
Matthew Graham  :  "keeps the balance sheet unchanged, but shifts the average maturity of the balance sheet further into the future."
Matt Hodges  :  "sterilized is supposed to avoid causing inflation"
Andy Pada  :  "I'm actually being serious what are the terms "sterilized" and "unsterilized" as they pertain to Fed action?"
Andy Pada  :  "what is "sterilized?""

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