Yesterday

- Does it matter?

Today

- FOMC Announcement at 2pm! (most important of the 3 Fed events)

- FOMC Member Forecasts also at 2pm (least important)

- FOMC Press Conference at 230pm (more important if no major movement at 2pm)

Strategy

Let's skip to the important stuff about today.  While there will be a backlog of three months of Housing Starts data released in the morning, as well as a new instance of Building permits, and while that could even prove to be a market mover in the morning, it's utterly and completely overpowered in every possible way (and even impossible ways) by the afternoon's FOMC data.  FOMC is the only reason financial markets bother to tune in this week.  Housing Starts are like the opening act that gets a few people in the seats because they're early for the headliner.

So what might happen?  Rates could spike drastically higher, or they could set about a happy, if modest, drift lower.  Although it's not the majority viewpoint, a tapering announcement is enough of a possibility that we should be prepared for it.  Maybe it's around 1 in 3.  Maybe a bit higher.  Survey consensus isn't as relevant after September's big whiff (vast majority expected tapering, incorrectly).  The important part is that it's being held out as a possibility, but not a probability by most market participants. 

We've seen the yields that markets associate with tapering being imminent and those entail a 10yr yield closer to 3% and mortgage rates closer to 4.875%.  This then, might be a solid guess as to how far markets could sell off if the Fed drops a taper tape bomb this afternoon. If they do, Bernanke's 230pm Press Conference will be used for damage control most likely.   Reason being: the Fed wants rates to go gradually higher, but they don't want us to freak out about it.

Conversely, if the Fed keeps the bomb doors closed, we can probably expect Bernanke to speak more forcefully about the impending nature of tapering.  Reason being: the Fed thought we'd freak out too much if they tapered today, but they don't want us to forget that it's coming and rates should be going gradually higher. 

The really fun thing about FOMC days is that something completely different could happen too.  That said, the aforementioned scenarios are probably higher probability 'baseline scenarios.'  To recap:

- modest chance of larger pain (taper)

- larger chance of modest gain (no taper)

- If taper, then Bernanke = damage control

- If no taper, then Bernanke = taper I.O.U.

On a final, fireside chatty note, I know rates are pretty high with 30yrs in the 4.5-4.625% range and 10yr Treasuries around 2.85% and that these facts, when combined with the fact that it's December, and the fact that late October may have seemed like a fairly hopeful time for rates, might leave us with the gut feeling that Fed wouldn't possibly hit us with tapering right now.  Indeed, they may not, but there is a laundry list of other factoids that make the opposite case.  The important thing is this: the Fed is unquestionably MUCH more justified in tapering now than they were in September.

Why?

Employment data has bounced back from missteps in the Fall.  Mortgage rates are lower vs Treasuries than they were in early September.  Other economic data has erred on the stronger side with little regard for the Government shutdown or the Fiscal debate.  And as of today, a budget deal is bound for the President's desk.  So many of the hurdles that were keeping the Fed on hold in September are now removed.  While this is no guarantee that it happens today, it's more than enough justification to suggest we prepare for it.

That means being ready to react to quick moves at 2pm.  Make sure everything that can't afford to lose ground is locked.  It's not likely, but there's an increased chance we wouldn't be back to current rates for a while.  Make sure that anything floating is as ready to lock as it can be (but keep in mind, some lenders will shut down the lock desk right at 2pm, so there won't be time to react).  Use Treasuries to gauge how serious a potential sell-off is unless (except in the event that the Announcement sends MBS and Treasuries in opposite directions, then stick with MBS of course).  The first major zone of badness in 10yr yields is around 2.92, the next around 2.98, and anything higher is more than enough to rule out a knee-jerk.

Charts

Historical similarities with the approach to the June FOMC meeting.  The orange bars are 10yr yields and all the confusing, encircled stuff is just making a case that the metaphorical gauges on the vehicle that is "bond markets" are behaving in roughly the same way in both instances.  It doesn't mean things will happen in the same way from here on out, but it keeps it on the table.

Similar, slightly less complex version of the same "similarities" between now and June in terms of MBS Prices.