For a full recap of yesterday's bond market sell-off, read this. For a synopsis, read this: Bond markets sold off yesterday, not so much because of the uncertainty introduced by the new verbiage in the FOMC Announcement, but rather due to the Fed members' rate hike forecasts, which were both sooner and larger than they had been last time. This combined with Yellen's 'no-punches-pulled' willingness to define "considerable" in her press conference.
(As an aside, while Bernanke would likely have found a way to leave the door open to multiple interpretations of a concept in the policy statement, Yellen's candid "about 6 months" answer is actually a bit of a stroke of genius. What did it cost us yesterday? The damage was largely already done by that time, so it only amounted to a bit of intraday volatility, and at most, another eighth of a point of weakness in MBS. That's a great price to pay to forgo months and months of "debating what the Fed Chair might mean." For all those who advocate ripping off proverbial band-aids, Yellen obliged. It hurt yesterday, but the long term benefits are compelling).
All told, MBS lost exactly three quarters of a point to end at levels not seen since January 22nd. The nice thing about this sell-off is that it's not the sort of thing that creates prolonged selling pressure and volatility due to constant guessing about what the Fed might mean. It was actually pretty clear: continue tapering $10bln, wrap up by late 2014 and begin rate hikes about 6 months later.
Yesterday was abrupt because the adjustment to previous expectations was able to be priced in almost instantaneously, but we're not likely to be discussing an "ongoing reaction to changes in Fed policy" by next week in the same way it pervaded every waking moment of mid-to-late 2013.
The conclusion is that we can now move on to domestic economic data, which we hope will slowly take over market movement duties from Geopolitical risk. Today is another decent day to see that in action with several reasonably important reports and the significantly important Philly Fed index at 10am.
Before that, we'll get weekly Jobless Claims--also much more important than normal as this week covers the time frame during which companies were surveyed for the next Payrolls release on April 4th.
From a technical standpoint, MBS are in a tough spot considering intermediate movement around 104-00 in Fannie 4.0s
Fortunately for the overall momentum in bond markets, there's still potential for support based on Treasuries ongoing ground-holding under 2.82 (analogous level to 104-00 in MBS).
On a final note, one interesting thing to watch today will be the result in Existing Home Sales. Pending Home Sales' stated goal is to beat Existing Sales to the punch, and it frequently captures trend changes ahead of time. Considering the relative freefall in Existing Sales recently, it will be interesting to see if it indeed holds more sideways today as Pending Home Sales predict.
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