REPRICE RISKS WERE ELEVATED BRIEFLY.  NOT OUT OF THE QUESTION FOR A LENDER TO REPRICE FOR THE WORSE, BUT VERY UNLIKELY, ESPECIALLY AS MARKET CONTINUES TO TRADE AND STABILIZE.

At 2pm, minutes of the last FOMC policy meeting were made available. 

Here are the highlights from FOMC minutes:

  • FOMC MEMBERS BELIEVED EXTENDED PERIOD LANGUAGE WOULD NOT PRECLUDE PROMPT POLICY TIGHTENING IF NEEDED
  • A FEW FED MEMBERS AT MARCH 16 MEETING SAW OF RISK OF EARLY RATE HIKE EXCEEDING DANGER OF WAITING TOO LONG
  • BANK LENDING IS STILL CONTRACTING
  • HOENIG WAS ONLY MEMBER OF COMMITTEE TO EXPRESS CONCERN OVER "EXTENDED PERIOD" LANGUAGE
  • MEETING PARTICIPANTS FELT UNDERLYING INFLATION LIKELY TO STAY SUBDUED
  • POLICYMAKERS CITED SIGNS THAT INFLATION EXPECTATIONS "REASONABLY" WELL-ANCHORED
  • MEMBERS WORRIED ABOUT ELEVATED UNEMPLOYMENT, FEARED RECOVERY COULDN'T BE SUSTAINED WITHOUT PICKUP IN JOBS
  • HOUSEHOLD SPENDING TO BE CONSTRAINED BY WEAK LABOR MARKETS, TIGHT CREDIT, SLOW INCOME GROWTH-FED MINUTES
  • CONCERNED PACE OF HOUSING ACTIVITY LEVELING OFF, FORECLOSURES TO REMAIN "QUITE HIGH"
  • IF ECONOMIC OUTLOOK WORSENED OR TREND INFLATION DECLINED FURTHER, "EXTENDED PERIOD" OF LOW RATES COULD LAST "QUITE SOME TIME"

Re: the use of the phrase "Extended Period" in the FOMC Statement:

A number of members noted that the Committee’s expectation for policy was explicitly contingent on the evolution of the economy rather than on the passage of any fixed amount of calendar time. Consequently, such forward guidance would not limit the Committee’s ability to commence  monetary policy tightening promptly if evidence suggested that economic activity was accelerating markedly or underlying inflation was rising notably; conversely, the duration of the extended period prior to policy firming might last for quite some time and could even increase if the economic outlook worsened appreciably or if trend inflation appeared to be declining further.

This means that the removal of the phrase "EXTENDED PERIOD" from the FOMC Statement does not imply the Fed will be hiking the Fed Funds Rate in the following six months. A rate hike is solely dependent upon economic developments.

The Staff's Outlook:

"In the forecast prepared for the March FOMC meeting, the staff’s outlook for real economic activity was broadly similar to that at the time of the January meeting. In particular, the staff continued to anticipate a moderate pace of economic recovery over the next two years, reflecting the accommodative stance of monetary policy and a further diminution of the factors that had weighed on spending and production since the onset of the financial crisis. The staff did make modest downward adjustments to its projections for real GDP growth in response to unfavorable news on housing activity, unexpectedly weak spending by state and local governments, and a substantial reduction in the estimated level of household income in the second half of 2009."

Overall, continued cautiousness is obvious. Much is still uncertain from their point of view, but there is plenty of weakness to warrant an exceptionally low level of the Fed Funds Rate for an "extended period" of time.

The bond market reacted well to the minutes, but so did the stock market.  And with the S&P breaking out of the key technical range discussed yesterday, bonds have backed up to just over their highs of the day as MBS near their lows. 

But take a look at the stock market leading the bond market around... 

Also, I didn't want to clutter up the chart too much, but notice how bonds go on alert when the threat of that breakout surfaces earlier.  And then notice that stocks back down around 130 (1330 in the chart time), and AFTER stocks fall a bit, bonds start to relax.  then boom...  breakout....

BUT for now, bonds are fighting the good fight.  The yield curve technicals at 282bps are either forcing 2yrs to rise or 10yrs to fall.  The RISK of a reprice for the worse is slightly higher, BUT as far as whether or not you'll see them, especially given that FOMC minutes decrease volatility and provide marginal incremental benefit to MBS vs. Tsy's, we might keep listening to Wilson Phillips until further notice.