The best thing that bond markets (and stocks too, for that matter) could have hoped for from today's FOMC Minutes would have been a fractured Fed board, starkly divided about what to do with the impending reduction in QE purchases. But no... They're pretty much on the same page: tapering is still on the table. It still makes most sense to do it when Bernanke follows with a press conference and it's still dependent on economic data.
The Fed has their concerns, and if you try hard enough, you could make a case that those concerns are growing (especially if you consider that the 'miss' on the last jobs numbers came after this Fed meeting took place), but even then, the Fed is saying far fewer "new things" than they are repeating the "same things." The conclusion: tapering is still on the table for September.
Today's Minutes weren't seen as likely to hold any new and exciting information, but there was a possibility that they'd offer some counterpoint to the seeming conviction with which markets have seized the notion of "Sep-taper." When no such counterpoints arrived (or at least when they were overshadowed by the status quo) stocks and bonds sold-off immediately.
Whether it was the lighter-than-average post-FOMC volume, a knee-jerk reaction working through the system, or a legitimate ebb and flow in the qualitative reading of the Minutes, doesn't matter. The day ended with stocks and bonds at their weakest levels.
As the Fed just reiterated, economic data is important. To that end, we have Jobless Claims tomorrow morning and New Home Sales on Friday. It remains to be seen, however, how much the seasonal factors are distorting trading levels. Tomorrow is actually most helpful in that regard (because Claims is the biggest report of the week, sadly). If volume falls appreciably, then it remains possible that we're seeing illiquid, defensive market dynamics result in higher yields than we otherwise might. In either case, it's still up to data.
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing
is available via MBS Live.
Pricing as of 4:07 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
Losses Accelerate After Hours; More Reprice Risk
Volume is nothing compared to what it was surrounding the FOMC Minutes, but it's much higher than normal for this time of day, after the 3pm pit close for Treasuries. It's not friendly volume either--currently dragging yields to their highs of the day with 10's at 2.89. Fannie 4.0s are down 15 ticks at 102-04, close to multi-year supportive lines in the sand from 101-31-102-02.
Reprice risk has been a constant companion since the Minutes, but it's even more 'companiony' at the moment, and not in a good way. Additional negative reprices are possible, ESPECIALLY from lenders who haven't yet repriced.
Here's Why Bond Markets Are Uber Volatile After FOMC Minutes
First of all, the Minutes stood a chance--in the minds of some market participants--to TEMPER the certainty that tapering will happen in September. If you only want one bottom line, that would be it. In other words: "nothing to suggest tapering would be on hold."
Here's some more detail in the form of particular passages that not only abstain from such counterpoints, but actually do more to confirm the Fed is more unified in their intentions (emphasis added to important bits in CAPS):
" First, ALMOST ALL participants confirmed that they were broadly comfortable with the characterization of the contingent outlook for asset purchases that was presented in the June postmeeting press conference and in the July monetary policy testimony. Under that outlook, if economic conditions improved broadly as expected, the Committee would moderate the pace of its securities purchases later this year. And if economic conditions continued to develop broadly as anticipated, the Committee would reduce the pace of purchases in measured steps and conclude the purchase program AROUND THE MIDDLE OF 2014."
Thought: The "middle of 2014" is probably more of a focus than the inception time for tapering at this point, for what it's worth.
"A few members emphasized the importance of being patient and evaluating additional information on the economy before deciding on any changes to the pace of asset purchases."
Thought: A "few" is not a majority, or even as much as "several" or "some." It certainly isn't "most" or "almost all."
"The data received since the forecast was prepared for the previous FOMC meeting suggested that real GDP growth was weaker, on net, in the first half of the year than had been anticipated.3 Nevertheless, the staff still expected that real GDP would accelerate in the second half of the year. Part of this projected increase in the rate of real GDP growth reflected the staff's expectation that the drag on economic growth from fiscal policy would be smaller in the second half as the pace of reductions in federal government purchases slowed and as the restraint on growth in consumer spending stemming from the higher taxes put in place at the beginning of the year diminished."
Thought: in other words, they're aware of the recent weakness and still almost all are on board with mid 2014 QE exit.
"While recent mortgage rate increases might serve to restrain housing activity, several participants expressed confidence that the housing recovery would be resilient in the face of the higher rates, variously citing pent-up housing demand, banks' increasing willingness to make mortgage loans, strong consumer confidence, still-low real interest rates, and expectations of continuing rises in house prices. Nonetheless, refinancing activity was down sharply, and the incoming data would need to be watched carefully for signs of a greater-than-anticipated effect of higher mortgage rates on housing activity more broadly. "
Thought: They're watching data like this morning's EHS which were stronger than expected. Rising rates aren't yet deterring the Fed from tapering.
"References to specific dates could be misinterpreted by the public as suggesting that the purchase program would be wound down on a more-or-less preset schedule rather than in a manner dependent on the state of the economy. Generally, however, participants were satisfied that investors had come to understand the data-dependent nature of the Committee's thinking about asset purchases."
Thought: This means the door is open to tapering being done BEFORE mid 2014 if data suggests it. Scary thought for bond prices.
"participants considered whether it would be desirable to include in the Committee's policy statement additional information regarding the Committee's contingent outlook for asset purchases. Most participants saw the provision of such information, which would reaffirm the contingent outlook presented following the June meeting, as potentially useful; however, many also saw possible difficulties, such as the challenge of conveying the desired information succinctly and with adequate nuance, and the associated risk of again raising uncertainty about the Committee's policy intentions. A few participants saw other forms of communication as better suited for this purpose. Several participants favored including such additional information in the policy statement to be released following the current meeting; several others indicated that providing such information would be most useful when the time came for the Committee to begin reducing the pace of its securities purchases, reasoning that earlier inclusion might trigger an unintended tightening of financial conditions. "
Thought: THE FED WILL TAPER IN SEPTEMBER OR DECEMBER, because those are the two meetings with press conferences afterward. This is nothing new from them, but reaffirms that which we've already heard. If forced to pick between Sep or Dec right now, the data since that meeting hasn't been dire enough to change any of these conclusions. The "wait and see" folks are in the minority, and "almost all" are comfortable with the content of the last 2 statements as well as Bernanke's presser. There's not as much division in the ranks of the Fed as bond-market bears were hoping for, even if there's no compelling reason to expect anything worse than what could have been expected before. That Yin/Yang struggle is likely the reason 10yr yields are no higher than Monday's 2.90, but why we're seeing plenty of volatility in determining that.
Full Minutes Release
Weaker Still; More Negative Reprice Risk
Going to Defcon 2. 10's at 2.882. Fannie 4.0s hitting lows of the day. Negative reprice risk is incrementally higher than the last alert.
First Move After FOMC Minutes is WEAKER. Reprice Risk
10's shot from 2.81 to 2.86 in less than 10 seconds. MBS tanking. No way to know if this is sustainable or a knee-jerk yet, but negative reprice risk is here right now until further notice.
Back Into Stronger Territory Now
Here's the second daily installment of a 'heads-up' that prices are heading back toward unchanged levels after a previous alert. The story so far:
1) negative alert after Existing Sales data
2) subsequent update re: bouncing back
3) another alert prompted by 1 investor reprice, faltering prices
4) another update now as that weakness has been shaken off
Fannie 4.0s are now down only 1 tick on the day at 102-18 and 10yr yields are within 1bp of unchanged at 2.827. Trading is relatively quiet at the moment with the near term focus being FOMC Minutes at 2pm.
Negative Reprice Reported; Prices Falling; Caution Ahead of FOMC
The bounce back after Existing Home Sales may have mitigated negative reprice risk but it apparently didn't eliminate it as one investor just repriced negatively. Fannie 4.0s are down 6 on the day at 102-13, still well off their post-data lows at 102-10. 10yr yields are similarly off their weakest levels (2.849 vs 2.858 earlier).
The combination of equities and bond market trading gives the impression of growing apprehension ahead of FOMC Minutes at 2pm, or at least a move to the sidelines. Reprice risk still isn't implied by MBS price movement, but the presence of a large investor reprice now suggests we can't rule out the same for other investors.
Live Chat Featured Comments
JRS : "REPRICE: 3:38 PM - BB&T Worse"
JRS : "REPRICE: 3:38 PM - Stonegate Mortgage Worse"
Nate Miller : "REPRICE: 3:38 PM - Homebridge Worse"
JRS : "REPRICE: 3:37 PM - Franklin American Worse"
lhefner : "REPRICE: 2:51 PM - Flagstar Worse"
Eric Franson : "REPRICE: 2:49 PM - Wells Fargo Worse"
philip mancuso : "I agree. many of us have attempted to keep on a brave face about rates being ok where they are. the consumer says differently, which is why apps are down 60%. how you and I may do amidst this is a different story. The bottom line is consumers feel loans are overpriced and have voted with their feet."
philip mancuso : "MH, I understand your perspective. Been here since 1987. Where rates were and are today isn't the point. If I sold you a computer for 2000 bc mine is 1985 was 3000 would that be reason enough for paying that price today?"
Pat Staffa : "At this point does everyone here see the FED tapering in September? I was optimistic until today but I think it is reality."
Tim Mitchell : "problem is we're all spoiled, rates have been dropping for 12 years and everyone has refied 4 times. Sooner or later we have to break out into a purchase market"
Matt Hodges : "simply amazing...no historical perspective... been doing this almost 15 years... mid 4's - these are fantastic rates"
Nate Miller : "REPRICE: 2:28 PM - Caliber Funding Worse"
Rob Clark : "REPRICE: 2:25 PM - Provident Funding Worse"
Tim Mitchell : "If the FED doesn't move to split the MBS and the Treasury program, IE continue MBS and taper Treasuries soon, September will be layoff month"
John Tassios : "Tim M, how is your purch biz overall at your company, is that staying strong or dropping? Since you are nationwide, I figure you would be a good indicator more nationwide trends"
Amitab Mukerjee : "" Fed is very serious about ending the taper asap." THis."
Edgar : "The day the Fed anounces the specific plan to taper is the day the market will top, then work towards settling and eventually return to it's 30-40 year down trend. At this point it seems rates will continue to go up until we get some really bad data (August employment report maybe) or the Fed clearly lays out the start date/ampunt of the taper. Even if the Fed pushes it back 6 months, I don't think a rally follows (at least not a long term significant one) because everyone believes the Fed is "
David Straight : "REPRICE: 2:17 PM - Gateway Mortgage Group Worse"
Amitab Mukerjee : "MH: If it wasn't for this site, I'd be in meltdown today having played my chances"
Matt Hodges : "MG - i appreciate this service... able to lock one prior to RP"
Tim Y : "lets see what happens when you add a taper tantrum on top of a string of hindenburgs..."
Amitab Mukerjee : "There was nothing in there, it sounds from MG's quotes that suggest a deviation from the now "foregone" conclusion of a taper."
Matthew Graham : "" First, almost all participants confirmed that they were broadly comfortable with the characterization of the contingent outlook for asset purchases that was presented in the June postmeeting press conference and in the July monetary policy testimony. Under that outlook, if economic conditions improved broadly as expected, the Committee would moderate the pace of its securities purchases later this year. And if economic conditions continued to develop broadly as anticipated, the Committee would"
Matthew Graham : "Looking pretty real at this point. Bottom line: minutes didn't slow the Fed's roll."
Matthew Graham : "the wires obviously arent' telling the story, gotta dig "
Sung Kim : "apparently the bond market does not agree"
philip mancuso : "worried about jobs, rates and inflation. "
Victor Burek : "agreed"
Charles Tadros : "this sounded great to me..."
philip mancuso : "seems dovish to me"
Chris Headrick : "felt a little more dovish to me..."
Christopher Max : "It all looked good? No?"
Sung Kim : "a whole lot of nothing is not good"
Ken Crute : "am I reading that wrong, or is that about as good as we could have really expected ?"
Jason Anker : "sounded like what we expected from them"
Tom Bartlett : "whole lot of nothing"
John Paul Mulchay : "nothing too negative in that first reading"
Troy Evans : "this should bounce shouldn't it?"
Victor Burek : "seemed friendly to us"
John Paul Mulchay : "knee jerk for now"
John Tassios : "that pretty much killed the comeback"
Matthew Graham : "RTRS- SOME PARTICIPANTS CONCERNED THAT HIGHER MARKET RATES COULD BE SIGNIFICANT FACTOR RESTRAINING ECONOMIC GROWTH--FED MINUTES "
Matthew Graham : "RTRS- A FEW PARTICIPANTS WORRIED CHANGES TO FORWARD GUIDANCE COULD UNDERMINE POLICY EFFECTIVENESS--MINUTES "
Matthew Graham : "RTRS- SEVERAL FED PARTICIPANTS WILLING TO CONSIDER LOWERING 6.5 PCT UNEMPLOYMENT THRESHOLD FOR INTEREST RATES IF EASIER POLICY NEEDED--MINUTES "
Matthew Graham : "RTRS- FED MINUTES SAY U.S. JOBLESS RATE HAD DROPPED "CONSIDERABLY" SINCE QE3 BEGAN, BUT SOME OTHER MEASURES SHOWED MORE MODEST LABOR MARKET GAINS "
Matthew Graham : "RTRS - INFLATION PERSISTENTLY BELOW 2 PCT TARGET COULD POSE RISKS TO ECONOMY--FED MINUTES "
Matthew Graham : "RTRS- A FEW MEMBERS STRESSED PATIENCE IN DECISION TO REDUCE BOND BUYS; A FEW OTHERS SUGGESTED MIGHT SOON BE TIME TO 'SLOW SOMEWHAT' PURCHASE PACE--MINUTES "
Matthew Graham : "RTRS- FED MINUTES SHOW ALMOST ALL FOMC MEMBERS AGREED CHANGE TO FED'S ASSET PURCHASE PROGRAM NOT YET APPROPRIATE AT JULY MEETING "
Ira Selwin : "REPRICE: 11:23 AM - Chase Worse"