While the overnight session was slightly weaker and the 10yr auction made things that much worse, the day's main event was undoubtedly the FOMC Minutes. There are two ways to look at the reaction.
The less interesting, more cynical way to account for the strong move after FOMC is to say that markets were preparing for something more negative. And when they didn't get any bad news, a relief rally ensued.
But that's pretty boring and probably not accurate.
The run up to the FOMC Minutes release really began yesterday at noon. Bond markets had just rallied nicely for two days and after the European session closed, Treasuries/MBS began heading slowly and steadily into weaker territory.
That grinding trend-channel continued right through the overnight session (in Treasuries anyway, MBS were asleep) and into today's auction. In the grand scheme of things, the auction made for a nasty little bump in the road, but didn't exactly alter the broader trend. Here's what it all looks like:
It's possible--even probable--that bond markets were ready to go either way depending on the read of the Minutes. After all, the recent range is narrow enough that doing either from 2.60 is not too much to ask. The hesitation immediately following the release is most likely attributable to the QE termination timing discussion where October looks increasingly likely compared to December.
But as market participants dug deeper into the text of the Minutes (beyond the headlines), they saw a SIGNIFICANT discussion on the timing of the end of reinvestments. This is the bond-buying that the Fed does with the proceeds from it's portfolio.
Last year, the party line was that reinvestments would stop before the rate hike. A few Fed speakers grew more vocal this year in saying the Fed shouldn't be so quick to end reinvestments. The discussion was important enough to markets that it was the most likely market-mover at the last FOMC Minutes release as well, but in the opposite direction (because markets were expecting to see a more thorough discussion--much like today's).
When that discussion instead came today, we got the rally that was priced-in back in May (seriously... it was the same 4+ basis point move then and now). Why is this reinvestment business so important? Quite simply because this will be the Fed's "bond buying" between the end of QE and whenever reinvestments cease. This is running at $16 billion per month currently, which is still a majority of new TBA production.
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing
is available via MBS Live.
| MBS || |
98-13 : +0-04
102-13 : +0-03
105-22 : +0-02
| Treasuries || |
0.4801 : -0.0239
2.5558 : -0.0092
3.3782 : -0.0028
| Pricing as of 7/9/14 5:15PMEST |
Today's Reprice Alerts and Updates
2:45PM : Bond Markets Reverse Course; Rallying After Post-FOMC Stutter Step
1:04PM : ALERT ISSUED: First Move is Weaker Following 10yr Auction
9:49AM : Bond Markets Slightly Weaker Overnight; Fighting to Hold Ground
MBS Live Chat Highlights
Ted Rood : "we're up as much as 8-10 /32 since pricing came out, reprices should be imminent."
Matthew Graham : "figure a rate sheet baseline of 102-05. So 102-13 is a quarter point better. Seems like solid positive reprice potential territory. Lenders will vary in how long they'd like to see it hold."
Morgan Hammer : "What is the threshold bonds need to break to see a positive reprice"
Hugh W. Page : "Fed is just stating more of the obvious keeping the message consistent. The risk of course is complacency and an unexpected event causing a change in course. Markets would love that."
Matt Hodges : "the roll is psychological only"
Victor Burek : "the roll doesn't impact pricing"
michael kirsch : "sorry to ask redundant questions, my internet was out most of today, with the coupon rollover taking place tomorrow and the poor performance today, what kind of bps hit are we looking at moving into tomorrow"
Matthew Graham : "RTRS - MANY PARTICIPANTS WANT TO END PORTFOLIO REINVESTMENTS AT OR AFTER FIRST RATE RISE – MINUTES"
Matthew Graham : "RTRS - FOMC MAY END BOND BUYING PROGRAM FOLLOWING OCTOBER MEETING IF CERTAIN ECONOMIC CONDITIONS REMAIN POSITIVE - MINUTES"
Matthew Graham : "RTRS - FEDERAL RESERVE OFFICIALS GENERALLY AGREE DUAL USE OF INTEREST ON EXCESS RESERVES (IOER), REVERSE REPO FACILITY IN NORMALIZING POLICY – FOMC MINUTES"
Matthew Graham : "D-"
Matthew Graham : "RTRS- U.S. 9-YR 10-MO NOTES BID-TO-COVER RATIO 2.57, NON-COMP BIDS $16.51 MLN"
Matthew Graham : "RTRS- U.S. SELLS $21 BLN 9-YR 10-MO NOTES AT HIGH YIELD 2.597 PCT, AWARDS 14.04 PCT OF BIDS AT HIGH"
Matthew Graham : "speaking of 1pm WI, it's at 2.585 - 2.586"
Matthew Graham : "As for the yield award, those have been mixed, but the last two reopenings have come in more than a full bp higher than 1pm WI"
Matthew Graham : "Bid-to-cover on reopenings (which is today) should be held up to a higher bar. That means it may impress Santelli if it comes in over 2.7, but realistically, 2.85+ would just be average. The last 3 reopenings have been 2.92, 2.76, and 2.88. "
Victor Burek : "auction preview?"