MBS RECAP: Energizer Bunny Rally for Mortgages


It’s been a slow-motion reaction to the extra-large ‘beat’ in Pending Home Sales, but we may be confirming a bounce at the highs. Offsetting the much better-than-expected home sales data has been another dose of Fed speakers jumping in to moderate the market’s tapering expectations.

Dudley was first up in this regard, with his prepared remarks hitting at the same time as Pending Home Sales (likely softening the otherwise more bond-bearish blow). In other words, Dudley’s reminder that the Fed’s withdrawal of QE3 depending on economic conditions and not on calendar dates, as well as his assertion that the Fed would keep most assets on balance sheet for a long time (meaning more accommodation for mortgage markets) was a positive factor for bond prices versus Pending Home Sales being a negative factor.

Fed’s Powell was just out in a similar vein, but was less obviously trying to talk markets off the ledge. He even went so far as to argue the other side of the “soothing agenda” by saying that tapering and withdrawal could happen EVEN SOONER if economic conditions warrant. Granted, he was likely trying to emphasize the same point about the decision being “all about economic data,” but in so doing, made another statement that stood the risk of spooking bond markets.

Dudley, in his QA, which is ongoing, subsequently reiterated the same notion, saying that economic data is MORE IMPORTANT than the risk that tighter financial markets may hurt the economic recovery. In other words–and this is an important point–THE FED IS NOT IN THE BUSINESS OF TRYING TO PREDICT HOW THEIR POLICY CHANGES WILL AFFECT THE RECOVERY! Data first, policy reaction second!

Bond market bulls would hope for something else–perhaps for the Fed to be concerned enough about the recent rise in rates to “do something” about it in the next few months, but Dudley is reaffirming that which we’ve already harped on. Again, that’s “data first, reaction second.”

The extent to which that is playing in to the incremental weakness we’ve seen since 10am is unclear, but there’s no need to overcomplicate things. Bond markets hit their best recent levels and then got a healthy dose of bullish economic data. They’ve since turned a corner and are heading in the other direction. Rate sheets generally came out before that corner was turned, so some negative reprice risk is a factor soon-ish. Fannie 3.5s are off their 101-04 highs, down 6 ticks to 100-30.

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