Bond Markets Reverse Course; Rallying After Post-FOMC Stutter Step
Quite a stark reversal is underway, at least in the context of a fairly narrow range. Immediately following the FOMC Minutes release, bond markets extended previous weakness just slightly. Thirteen minute later, trading levels were still in line with pre-FOMC levels, near the weakest of the day.
But since then, we've been rallying. In fact, MBS and Treasuries are both back into positive territory on the day. The only salient justification for this lies with the only salient change between this Fed meeting and the last.
Here's an excerpt from the MBS Live alert that followed the last FOMC Minutes:
There were no glaring surprises in the FOMC Minutes (which provide a
more detailed account of the meeting that took place over 3 weeks ago),
though there was mention of a discussion regarding how the Fed should
reinvest its asset holdings.
With that in mind, it's important to note that markets were very
interested in Dudley's comments yesterday regarding a change-up in the
reinvestment game-plan (i.e. the Fed should not stop reinvesting before
they raise rates). That's an MBS-positive factor that is missing from
the Minutes. In other words, markets "bought the rumor" to some extent
yesterday and are "selling the news" a bit now.
Today's instance of the Minutes now specifically notes:
" It was noted that, in the staff's models, making a change to the
Committee's reinvestment policy prior to the liftoff of the federal
funds rate, at the time of liftoff, or sometime thereafter would be
expected to have only limited implications for macroeconomic outcomes,
the Committee's statutory objectives, or remittances to the Treasury.
Many participants agreed that ending reinvestments at or after the time
of liftoff would be best, with most of these participants preferring to
end them after liftoff." -July 9 Minutes
That's just a small portion of the reinvestment discussion this time around. Last time, this was the extent of it:
"A number of participants suggested that it would be useful to provide
additional information regarding how long the Committee would continue
its policy of rolling over maturing Treasury securities at auction and
reinvesting principal payments on all agency debt and agency
mortgage-backed securities in agency mortgage-backed securities."
- May 21 Minutes
In other words, that "rumor" that was bought, and subsequently sold at the last Minutes release is now eligible to be bought again. It took markets a few 'minutes' (pun not intended) to realize it and to get over the fact that asset purchases are likely to end at the October meeting.
Additionally, ECB president Draghi was out at 2:30pm with generally supportive comments for bond markets. The net effect has simply been a return to yesterday's strongest levels both in MBS and Treasuries.
Fannie 3.5s are up 1 tick on the day at 102-12 and 10yr yields are down just under 1bp at 2.559