Good Morning.

Rates are backing up and the yield curve is flatter this morning as the short end of the curve rises faster than the long end. Bear flattener...

The 10yr TSY note is -17/32 at 101-07 yielding 3.481%. The FN 4.0 is -0-09 at 97-29 yielding 4.215% while the FN 4.5 is trading -0-07 at 100-19 yielding 4.429%. The secondary market current coupon is 4.386%. Rate sheet influential yield spreads are tighter against benchmarks...again. Tighter yield spreads into a rates down trade is the norm for current coupon MBS (yay negative convexity).

Here is the FN 4.5 two day....

Early this morning the Financial Times released a story implying the Federal Reserve was "mulling" an alteration to the verbiage of their outlook on short term interest rates. Here is a comment from the story: 

"Ever since, the US central bank has stuck with the “extended period” phrase – indicating policymakers see little likelihood that interest rates will rise over a time frame that has never been defined, but some see as at least six months.

But now senior officials are starting to mull changing the statement in a way that would soften this guidance. That would be a natural step in the slow glide- path towards eventual policy normalisation."

We've addressed the effect of the market's perspective on short term interest rate policy and the reactive pressures of HAWKISH HEARSAY repeatedly over the past few weeks. In each instance of media or Fed official "hints" at future Fed rate hikes, speculative selling in the short end of the yield curve has occurred...which consequently pushed rates higher in the long end of the curve. A bear flattener. The fallout for loan originators...higher mortgage rates  (wouldnt that imply less rate locked fallout :-D).

We didnt panic then are not panicking now. The range is still the range. Play the Range Until the Range Plays You.

Remember, half the battle the FOMC is fighting is expectations. How the market is feeling and what the market is expecting really matters. Because the Federal Reserve is dealing with such a fragile economic environment...wouldnt it make sense for them to do a little market sentiment research using the capital markets as a gauge of policy effectiveness? The economy is walking a tightrope, with a deflationary downward spiral on one side and a hyperinflation on the other.

Here is a thought: In order for the Fed to ensure their policy efforts are efficiently implemented, one has to assume the Fed would "test the waters" of the market before jumping in head first. They can "test the waters" using the bully pulpit or by simply letting rumor and gossip filter through dealer desks down through the media onto main street. 

If you really think the Fed is preparing to position themselves for a rate hike, read the Beige Book. We, unlike others, did not view its findings all that encouraging.

The random range bound bounces we have been working through imply a short term "WE HAVE NO IDEA ABOUT THE LONG TERM OUTLOOK" bias still moderates positions. This implies, when trading/locking/floating, the news will often times serve as an excuse to execute a short term trade strategy. It's about intraday momentum and short term trending...not about the macro big picture. Currently we are focused on the $123 billion 2s/5s/5 TIPS/7s that will be auctioned next week. Since most of the debt is to be issued in the front/belly of the curve...it would make sense that the yield curve would flatten. The "rate hike" whispers are just helping traders bake in a supply concession. Again...the news is more of an excuse than a driving factor of sentiment. Dont forget how remarkably strong the bond market has been in the face of "better than expected" econ data, dont lose sight of the fact that we have been insulated from the relentless rallies occurring in equities. The market is range trading short term positions, not trending on BIG PICTURE outlooks.

Ben Bernanke is speaking right now. Here is his prepared speech.