Interest rates have been determined and methodical about their slog higher from May 2nd levels. That's been well over a full percentage point both for mortgage rates and 10yr Treasuries, bringing them to a very prominent base camp on the mountain of the historical range. From this camp, they're at their best level of readiness to receive the information coming on Wednesday from the Fed. Whether the next major phase for rates is higher or lower, this spot (roughly 2.9 in 10yr yields and 102-24 in Fannie 4.0) makes for the lowest amount of total possible pain (in that being any lower in rate would be very painful if 10yr yields were to progress to technical levels in the 3.13 area and being any higher would be similarly painful if we rally to the 2.70 area).
Coming into today, the inhabitants of the base camp knew they'd be making the final preparations to be most ready to move higher or lower on Wednesday. That's part of the downside of a nimble location: trading positions and even expectations are set for big news on Wednesday, but not to receive relatively big news before trading even starts on Monday morning. Yet that's what happened with yesterday's announcement that Summers withdrew from Fed Chair consideration.
With all the stakes having been pulled up, this small avalanche of positive news for bond markets soon turned in to a snowball that rolled more than half way down to the last base camp at 2.70-2.74. Those betting on higher rates in general were forced to buy bonds to cover their short bets. Those who had bought bonds at recent brushes with 3% bought more this morning, other day-trading-type accounts joined in. Black boxes joined in as well, making the snowball massive by the time 9am rolled around.
Bottom line, because of the relatively more vulnerable position bond markets were in to unexpected shocks, the rally went on longer and farther than it otherwise might on such news. After the short-covering that started the rally was exhausted, all the other contributors began following suit. Long positions sold to book profits and black boxes rode the momentum coming back in the other direction. The snowball essentially melted--well, most of it anyway--and we're left with a baseball-sized chunk (Fannie 4's up 6 on the day) to represent the Larry Summers Withdrawal Rally vs Preparation for FOMC Wednesday trade. Conclusion: preparation for FOMC Wednesday is more important.
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 4:08 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
3rd And Final Consecutive Negative Reprice Alert
If you haven't seen one yet, you will, and if you've only seen one so far, odds favor 2. If you've seen 2 so far, 3 isn't out of the question (unless you JUST got the last one).
Fannie 4.0s are up only 8 ticks now at 102-27. 10yr yields are down only 1.5bps on the day at 2.8754. In hindsight, the Summers news simply acted to knock bond markets off their highly sensitive pre-FOMC perch. A rally of short covering (buying to end a bet on higher rates) and short-term new longs (bets on lower rates), gave way to an absence of short covering and those short term longs getting out, and here we are. Rally on, rally off.
Negative momentum seems to be subsiding now, but reprices could still be inbound, depending on the lender.
First Round of Negative Reprices is in, More Likely to Follow
Just a heads up to reiterate the likelihood of negative reprices. Fannie 4.0s are down to 103-02. While this is still 14 ticks up on the day, it's 12 ticks (.375) off earlier highs--plenty of weakness for most lenders to pull the trigger.
Negative Reprice Risk Increasing as MBS Hit Lows
Treasuries have been trending higher in yield since the 9:15am data, but it hasn't been a concern until just now. Yields had only moved from 2.78 to 2.805 by 10:50am and then bounced lower again, keeping the possibility alive of a sideways range.
In the past few minutes, 10's have broken above those 10:50am highs and are now back in line with 8:30am levels at 2.812. MBS are following the break with Fannie 4.0s heading to their weakest levels of the morning at 103-05 (previous highs at 103-14).
Though not all lenders will have priced at the highs, even at a more likely morning indication of 103-10 to 103-11, we're far enough down to warrant negative reprice risk for most lenders, assuming prices don't bounce immediately back into previous territory.
Live Chat Featured Comments
Christopher Stevens : "from wsj arrticle "Fed officials and most private economists thought inflation would be stronger this year. That it hasn't presents something of a mystery, given the overall economy has performed broadly in line with forecasts.""
Hugh W. Page : "This is why volatility has been with us for so long and will continue to be with us. They say they will act based on economic data but their forecasting never meets reality creating a reactionary Fed always behind the curve."
Hugh W. Page : "Fed has been wrong on economic forecasts for as long as I can remember. Why would it change now?"
Victor Burek : "i say they justify as everyone of their forecasts are overly optimistic"
Matthew Graham : "gist is that economic forecasts may show better growth, but rate forecasts may remain low, then poses question: how does Fed justify/reconcile that juxtaposition?"
Andy Pada : "i can't get the article without a subscription. what are the highlights?"
Victor Burek : "bet the market makers had it early"
Matthew Graham : "that didn't start making the rounds until after 2pm though, best I can tell."
Victor Burek : "don't think that link will work...google this and you can then read. Fed Faces Tough Sell on Low-Rate Strategy"
Victor Burek : "here is the hilsenrath article...this might explain today's weakness, http://online.wsj.com/article/SB10001424127887323342404579079143276866818.html"
Steve Chizmadia : "Sure +-27 is much nicer, but green is green, and pricing is better now than it has been in weeks. "