Potential Analogies:

- The Green Room

- The Bull Pen

- The Lobby

- Backstage

- Early for the Party

- Practice Game

- Warm Up

- Dress Rehearsal

- ???

Ok, for the sake of continuity, lets go with the sports analogy to refer to bond markets of late.  "On Deck," "bullpen," "scrimmage," or "pre-game warm up" would all work, among others.  No matter how you want to refer to it, it's as if tsy and MBS markets of late have been confined to a pre-determined area in which they can practice, prepare, wait, have some fun within reason, and otherwise rehearse their moves without the "big show" consequences.  Whether you or I are inclined to view today's FOMC announcement as pivotal doesn't matter.  Traders do.  Simple as that...

It's not because a majority EXPECTS a certain outcome, but rather, today's Announcement--to extend the analogy--would be like the referee bringing the teams to center court (or field, or whatever!) and telling them the rules of the game.  Maybe the rules will be the same as they've always been, but maybe, just maybe, there will be a twist.  Randomly placed landmines in the red zone anyone?  Whatever the case, the game in question cannot be given its due until the players get this briefing.  Even worse, the uninformed player stands to incur penalties for his/her team or worse yet, step too hard on one of those landmines.  And so it is that we continue to wait for fog to be lifted, hoping to find something exciting and positive, but fully prepared for extremely generic iterations of equivocations past such as: "continue to act as needed to promote...," "downside risks remain, but are easing," "prepared to," "if necessary," "continue to monitor," and the like...  Given the market's recent ability to fight off a 4% 10 yr note of its own accord combined with gradually improving indicators, it's not likely for a mega bond rally tape bomb to be unleashed.  But if the Fed really does stand by previous assertions that low mortgage rates are key to recovery, perhaps they too are frustrated at the recent spike.  Or perhaps 5% range is just fine with them...  Anything's possible...  Most likely though, it will be something to the effect of "will continue to purchase MBS and Tsy's," and perhaps even a "stand ready to increase as needed."  Less friendly would be anything in the statement that references "consider early phasing out" of those purchases.  Either way...  Excitement!

Given all of the above, there is only one possible course of action for bond markets up until 2:15pm.  Range Trade...

We've been pretty keyed in on 3.62 and 3.68 recently on the 10yr as technical range boundaries, and these have indeed been the floor and ceiling today.  MBS as always (recently anwyway) have been taking their cues from the yield curve, so the range translates there as well.  Even the mighty Durable Goods Surprise of 2009 couldn't puncture 3.82 on the upside.  That being the case, we're inclined to chalk any pre-FOMC movements up almost exclusively to the pre-game, warm-up, bull-pen range trade.  Well, more than inclined really...  That's just the way it is...

BUT!  Only for a few more hours!!!

The "tip-off," as it were, may come as early as the 5yr tsy auction results at 1pm.  As discussed yesterday, this could start the PSYCHOLOGICAL momentum of the game in one direction, thus allowing an expectedly equivocal statement to more likely be interpreted in that direction.  Read the last sentence again...  SO much of the post-FOMC movement can be momentum based.  If the statement is a "blank-slate," open to interpretation, then majority rules and the momentum going into the announcement would be uncommonly important... With that, some caution is in order considering the huge proportion of indirect bids suggested by yesterday's 69% reading.  If indirects don't live up to those lofty levels today, it leaves the primary dealer market to pick up the slack, and they might not be as up to the task as normal due to their recent penchant for shorting the 3-5 yr duration proxy, not to mention the balance sheet reductions that have already taken place over the last two weeks in preparation for quarter end "window dressing.  Long story short, cover your shorts!  Because the primary dealer market may not be doing enough of that today to create MBS friendly momentum going into the announcment. Here is a look at previous 5 yr note auctions...

And so we wait a little over an hour for the "tip off."  Barring unexpected moves outside the range, we'll be back with you then, in full force, giving you the play by play as the action unfolds.


2s vs. 10s: 246bps