Bond markets (and markets in general) periodically experience an interesting phenomenon whereby traders are determined to make one of two bets following an anticipated piece of news.  This is most often seen in the reaction to the monthly NFP numbers.  Traders aren't always as determined to forcibly extract meaning from Fed communications, but when they are, the reactions tend to be more abrupt.

Today was such an occasion.  Janet Yellen could have taken her seat in the Senate and simply pointed discreetly toward the ceiling and the market response would have been the same.  Investors were ready to trade rates quickly to the low or high side of the recent range if they read Yellen's remarks as indicating lower or higher chances of a March rate hike respectively.

The first few newswires were all it took for the "higher chances" trade to shift into high gear.  Specifically, Yellen said a rate increase would likely be appropriate at one of the Fed's "upcoming meetings" and that waiting too long would not only be "unwise," but could also require "rapid, disruptive rate hikes that push the economy into recession."  

Markets reckoned that sounded like a Fed chief who stood a decent enough chance to lobby for a March rate hike.  If they don't hike in March, they'd most likely wait until June (because Mar/Jun/Sep/Dec Fed announcements have press conferences, which the Fed seems to prefer when making changes, even though they've said it doesn't matter).  And a June hike doesn't seem to fit with Yellen's comments.

Bonds sold off quickly and fairly sharply.  Later in the testimony, during Q&A, Yellen struck something of a dovish tone, pointing out that the Fed wasn't considering decreasing its MBS reinvestments any time soon and has no plans to sell MBS outright.  That was already the assumption among bond traders, but confirmation was reassuring.  It paved the way for a moderate correction in the afternoon, despite another record day for stocks.


MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
MBS
FNMA 3.5
102-01 : -0-05
Treasuries
10 YR
2.4716 : +0.0376
Pricing as of 2/14/17 5:21PMEST

Today's Reprice Alerts and Updates
A recap of Alerts and Updates provided to MBS Live subscribers.
10:37AM  :  ALERT ISSUED: Yellen Hints at Balance Sheet Reduction
10:05AM  :  Full List of Yellen Newswires
10:02AM  :  ALERT ISSUED: Yellen's Prepared Remarks Tank Bonds; Negative Reprice Risk
8:39AM  :  Stronger Producer Prices Add Pressure, But Bonds Hold Ground

MBS Live Chat Highlights
A recap of featured comments from the Live Discussion on the MBS Live Dashboard.
Brent Borcherding  :  "New lows for 30 year mortgages will be reached in 2017."
Matthew Graham  :  "just the common refrain about late 2016 being a massive generational shift toward higher rates. Suddenly everyone is so sure... (too suddenly and too sure, in my opinion)."
Ray J  :  "ok. now im curious"
Matthew Graham  :  "lower bond prices so they can buy some more."
Matthew Graham  :  "better entry point!"
Ray J  :  "why's that MG?"
Matthew Graham  :  "Anyone who's smart would LOVE to get rates as high as possible right now, given the underlying structural problems with growth and demographics."
Ray J  :  "yeah, the volatily does create opportunities and also can bring data to the surface"
Ray J  :  "hey, talking the rates higher without actually doing anything is a tactic"
Andy Pada, Jr.  :  "new normal"
Hugh W. Page  :  "It's so crazy that 9 years into this crisis we can talk only about the potential for 1 or 2 rate hikes this year."
Alan Craft  :  "Put me in the one hike camp"
Matthew Graham  :  "RTRS - LOCKHART SAYS DIFFERENCE BETWEEN OFFICIALS WHO SEE TWO VERSUS THREE RATE HIKES THIS YEAR HINGES LARGELY ON ANALYSIS OF WHAT TRUMP ADMINISTRATION MAY MEAN; PUTS HIMSELF IN THE TWO HIKE CAMP"
Scott Valins  :  "yikes March very much on the table"