After almost exactly half a year of discussing the mythical "Tapering" as a possible outcome of an FOMC Announcement (there were some grumblings about it on the June 19th meeting), it's finally happened. After all the build-up, all the ifs, thens, and maybes, today's announcement officially reduced the Fed's bond buying program by $5bln each for Treasuries and MBS.
Despite the arrival of tapering, bond markets didn't freak out as much as they might have. In fact, 10yr yields bounced very quickly on the tamest sell-off target that we laid out in this morning's commentary
and never made it back (2.92%
). MBS took the news slightly harder, but they didn't cross back into the ugly territory that preceded the September "no taper" announcement. Top that off with the fact that some very big lenders' rate sheets were flat or better by the end of that day and if you didn't read the news, there was no visible indication of the day's events.
One reason for that is that had to do with the amount that the Fed cut. It was on the smaller side of potential taper amounts for the Fed, and
something that we supported as an ideal way to approach tapering back
in September. The concept is uncomplicated: smaller pill... easier to
swallow. The very valid issue was that financial markets would care
more about the fact that the Fed was turning a corner and less that the
amount was smaller than expected. On that specific topic, all we have
are the comments from Fed speakers and even from Bernanke today that the
Fed may increase purchases in the future if needed. While that may be
possible, it's not probable without another recession.
The other reason that mortgage rates were able to take the taper more in stride today (and this wasn't fully evident until the day expired without major reprices from a few important lenders) is that rate sheets were positioned conservatively enough, in many cases, to soak up the MBS losses. It wasn't a mortgage-specific phenomenon either. The aggressive selling throughout November in bond markets was assumed to be a defensive stance for the jobs report and potential tapering. If the amounts had been closer to the consensus ($20bln vs $10bln), perhaps we would have seen 2.92% broken in 10yr yields as opposed to merely tested.
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 4:05 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
Volatility Continues After Taper Announcement; Negative Reprice Moderate Not Severe
MBS are now back down to their initial lows that followed the FOMC's Taper Announcement. Rather than stand out as the product of one significant headline that turned the tide, the move back into negative territory has been gradual, and more to do with an exhaustion of the knee-jerk short-covering that initially led rates lower.
If there was one point in Bernanke's press conference that added to the reversal it was this:
RTRS- ASKED ON 'MEASURED STEPS', BERNANKE SAYS WILL BE DATA DEPENDENT, IF WE ARE MAKING PROGRESS COULD REDUCE AT EACH MEETING, THAT WOULD TAKE US TO LATE IN THE YEAR
This could be as coincidental as anything, but whatever the case, 10yr yields steadily moved back up to 2.88% and Fannie 4.0s returned to their post-FOMC lows at 103-07.
There is SOME negative reprice risk at current levels, but not the excessive amount expected to follow a "taper" announcement. A fair amount of lenders will not need to reprice unless Fannie 4.0s fall decidedly below 103-05, and so far, this has acted as a support, post-Fed. The analogous support in Treasuries is a ceiling at 2.885. 10's are currently bouncing just lower from there at 2.8775.
Treasuries Back to Pre-FOMC Levels! MBS May Follow
The initial knee-jerk reaction to the FOMC Announcement is now completely reversed in Treasuries. MBS are likely to catch up soon. Negative reprice risk is rapidly abating. Stay tuned...
NY Fed Releases Extra Clarification on MBS Tapering
On December 18, 2013, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to purchase additional agency mortgage-backed securities (MBS) at a pace of about $35 billion per month and longer-term Treasury securities at a pace of about $40 billion per month, beginning in January 2014. The existing December schedules for agency MBS purchases at a pace of $40 billion per month and Treasury securities purchases at a pace of $45 billion per month remain in effect until that time. The FOMC also directed the Desk to maintain its existing policies of reinvesting principal payments from the Federal Reserve’s holdings of agency debt and agency MBS in agency MBS and of rolling over maturing Treasury securities at auction. The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. Full release
TAPER is Here. First Move is Much Weaker
MBS down to 103-07. Negative Reprice Risk is High. More to Follow...
Auction Negativity Now Fully Unwound Ahead of Fed
With just over an hour to go until FOMC, bond markets have backed completely out of their earlier selling spree. That weakness had followed the 5yr Note auction and took Fannie 4.0s down to 103-08, more than a quarter point lower on the day. Fannie 4.0s are now back up to pre-auction levels (slightly above actually) at 103-14. 10yr yields are back down to 2.88 after hitting 2.90 following the auction. Reprice risk is back to neutral and waiting on FOMC once again.
New Lows and Reprice Risk Following 5yr Auction
The 5yr Treasury auction has drawn out a good amount of volume and volatility. The demand for the Notes was much weaker with the bid-to-cover ratio coming in at 2.42 compared to 2.61 at the last auction.
More importantly, the high yield of 1.60 at auction is significantly higher than the 1.576 "when-issued" yield at the 11:30am cut-off. Taken together, this makes the auction about a "D" in terms of a letter grade and is sapping bond prices, even ahead of the Fed Announcement this afternoon.
Some lenders may reprice for the worse at current levels. Fannie 4's are down a quarter of a point (8 ticks) at 103-09. This is only about 3 ticks weaker than pre-auction levels though. 10yr yields are up a quick 1.5 bps to 2.894.
Live Chat Featured Comments
Jason York : "REPRICE: 3:56 PM - Fifth Third Mortgage Worse"
Andy Pada : "reality is that this guy and his policy made you all a lot of money in last 2 - 3 years."
Roger Moore : "all in all, this could have been much worse. I was bracing to be slaughtered today so i'll take this. "
Matthew Graham : "I think the run back to the lows was a bit scary. If you'd told those lenders we'd bounce again at 103-06 they may not have pulled the trigger."
Victor Burek : "only reason for reprice now is volatility"
Steve Chizmadia : "Secondary more likely than not padded their pricing a bit this morning as a protective measure. "
Jeff Anderson : "I prefer the MBSLive cliff notes."
Matthew Graham : "The whole culture of "MBS watching" is predicated on intraday risk. But that's not at all how the Fed should or will approach policy decisions, therefore they needn't be as in tune with the late-breaking potential market movers. They may not be interested in mortgage rates dragging on the recovery, but I'd be very surprised if that entered the discussion this time around with respect to G-fee / LLPA hike. "
Matthew Graham : "RTRS - HIGH YIELD AT LATEST 5-YEAR NOTE SALE WAS MORE THAN 2 BASIS POINTS ABOVE ITS 11:30 A.M. WHEN-ISSUED LEVEL - REUTERS DATA "
Matthew Graham : "RTRS - U.S. 5-YEAR NOTES BID-TO-COVER RATIO 2.42, NON-COMP BIDS $31.00 MLN "
Matthew Graham : "RTRS - U.S. SELLS $35 BLN 5-YEAR NOTES AT HIGH YIELD 1.600 PCT, AWARDS 2.21 PCT OF BIDS AT HIGH "
Victor Burek : "whoah..something leak?"