The Week Ahead: MBS Roll, Treasury Auctions, Fed To Extend Twist?

By the end of this week, bond markets will only have 8 full sessions left in 2012.  In December, the first two week’s of the month are almost always the busiest, and this “2nd week” should be no exception given the line up of data and events.  Whether or not the “busy-ness” translates to big swings in MBS, remains to be seen, but certainly Wednesday stands a good chance to be something less than a completely flat day for bond markets for several reasons.

Before then, the first two days of the week get things kicked off in a relatively sober manner with an inconsequential Employment Trends Index leaving the morning’s focus on the Fed’s Twist buying in 25-30yr range.  Specific to MBS, we bid farewell to the last of the 2012 Fannie/Freddie 30yr Fixed coupons as the December settlement stops trading at the end of the day.  That means that January coupons will be the new “front month” on Tuesday, thus making for an apparent “drop” in prices by Tuesday morning.

Tuesday itself is a bit more active–at least in terms of scheduled events–with International Trade at 8:30am, Wholesale Inventories at 10am, and the first of the week’s Treasury Auctions with 3yr Notes at 1pm.  While 3yr tenors haven’t been market movers for over a year now, Wednesday’s 10yr vintage is better-equipped for such things, or, they would be if they wouldn’t be yielding the stage an hour later to bigger fish.

The bigger fish in this case–probably the biggest of the week–is the year’s final FOMC Announcement.  It’s also the variety that includes the Press Conference and Member Forecasts, meaning that the 10yr Auction is bumped up to 11:30am, with the Fed Announcement at 12:30, Forecasts at 2:00pm and Presser at 2:15pm.  But it’s not the busy day that makes the event important.  Rather, it’s the expiration of Operation Twist later this month, and more specifically, the broad-based assumption that Wednesday will clearly be the time and place that some sort of an extension is announced.  The consensus is that the Fed will indeed keep buying Treasuries, but opinions differ as to how much they’ll buy and where the money will come from.

After that crescendo, the week’s fanfare isn’t likely to fade abruptly for several reasons.  First, Thursday itself, is no slouch in terms of data with Retails Sales, several ‘supporting role’ reports, and the last of the week’s Treasury Auctions.  Additionally, it’s also the day that Greece is supposed to get the bailout installment that was the subject of much debate and many a headline in mid to late November.  Activity ebbs again on Friday, but there are several pieces of data including Consumer prices, a first look at Markit PMI for December, and the Industrial Production numbers at 9:15am.