MBS
-31/32 @ 101.23 10 Yr T -31/32
@ 2.0430 DOW -80@ 15,307
Unfavorable
repricing took place. All eyes were on the Fed today. The big question for
investors is when the Fed will begin to scale back its bond buying program. The
initial remarks from Fed Chief Bernanke lifted MBS, but later comments caused
MBS to fall sharply (see below). April Existing Home Sales rose 1% from March
to an annual rate of 4.97M units, slightly below the consensus of 5.00M, and
the highest level since November 2009. They were 10% higher than one year ago.
The total inventory of existing homes available for sale rose 12% from March to
a 5.2-month supply, but was still down 14% from one year ago. Tomorrow, Jobless
Claims and New Home Sales will be released.
Bernanke's prepared remarks were released around 10:00 et and were viewed as bond-friendly, causing MBS to rise. Essentially, Bernanke's written statement gave no indication that the Fed expects to begin to scale back its bond purchases any time soon. In addition, Bernanke warned that a "premature" tightening of monetary policy would risk slowing the economic recovery and causing inflation to fall. During the Q&A that followed, however, Bernanke said that it's possible that the Fed could taper its purchases at one of its "next few meetings", based on economic conditions. According to Bernanke, the main requirement for reducing monetary stimulus is "sustainable" improvement in the labor market. Investors were surprised when Bernanke acknowledged the chance of an earlier than expected tapering, and MBS prices dropped sharply. At 2:00 et, the detailed Fed Minutes from the May 1 Fed meeting were released, and MBS moved even lower. The Minutes revealed that a number of Fed officials were open to scaling back the Fed's bond purchases as early as June if economic growth picks up enough. The Minutes suggest wide disagreement about what would constitute sufficient economic strength to cause the Fed to taper. Neither Bernanke's testimony nor the Minutes indicated that economic growth is currently strong enough to satisfy most Fed officials, making it unlikely that tapering will begin in the near term. Bottom line, the high level of volatility seen in recent weeks around data releases and Fed speeches is likely to increase even more.
Bernanke's prepared remarks were released around 10:00 et and were viewed as bond-friendly, causing MBS to rise. Essentially, Bernanke's written statement gave no indication that the Fed expects to begin to scale back its bond purchases any time soon. In addition, Bernanke warned that a "premature" tightening of monetary policy would risk slowing the economic recovery and causing inflation to fall. During the Q&A that followed, however, Bernanke said that it's possible that the Fed could taper its purchases at one of its "next few meetings", based on economic conditions. According to Bernanke, the main requirement for reducing monetary stimulus is "sustainable" improvement in the labor market. Investors were surprised when Bernanke acknowledged the chance of an earlier than expected tapering, and MBS prices dropped sharply. At 2:00 et, the detailed Fed Minutes from the May 1 Fed meeting were released, and MBS moved even lower. The Minutes revealed that a number of Fed officials were open to scaling back the Fed's bond purchases as early as June if economic growth picks up enough. The Minutes suggest wide disagreement about what would constitute sufficient economic strength to cause the Fed to taper. Neither Bernanke's testimony nor the Minutes indicated that economic growth is currently strong enough to satisfy most Fed officials, making it unlikely that tapering will begin in the near term. Bottom line, the high level of volatility seen in recent weeks around data releases and Fed speeches is likely to increase even more.
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