This week, once again, the release of Federal Open Market Committee meeting minutes cast a pall over the mortgage-backed securities market.
Recent month-to-date gains were wiped out as Barclays MBS Index lagged Treasuries by 11 basis points over the week through Thursday which sent monthly performance back in the red at by 3 basis points. Meanwhile, the 30-year current coupon spread widened to more than 65 basis points from 62 basis points last Friday.
The minutes from the late January meeting, released on Wednesday afternoon, revealed further discussion about curtailing or ending the third round of quantitative easing, possibly sooner than investors were expecting. While most participants acknowledged the benefits, "many participants also expressed some concerns about potential costs and risks arising from further asset purchases."
In addition, "Several participants emphasized that the Committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved." Also "a number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred."
There were also a few public appearances by Federal Reserve officials, and their comments suggested the central bank was likely to continue at its present pace through most of the year, at least.
In a speech on Thursday, San Francisco Fed President John Williams (a non-voter and inflation dove) said he expected purchases to continue until well into the second half of this year as he felt the Fed was not meeting its two mandates of maximum employment and price stability. In further remarks during an interview this morning, Williams said that while he was increasingly optimistic about the economic outlook, there still remained too many risks to start tightening monetary policy, such as Europe and sequestration.
In another interview during the week, Atlanta Fed President Dennis Lockhart (non-voter, moderate) said the economy still has a long way to go, particularly in regards to employment, to reach its full potential. While he would not speculate about how long the quantitative easing would last, he did say "my recommendation would be to continue [buying assets] through the end of the second half" of 2013.
Meanwhile, St. Louis Fed President James Bullard (voter, hawk) said in a speech at New York University that the central bank would not necessarily have to end quantitative easing if the job market was improving, though it could possibly slow the pace.
Despite these comments and the still favorable supply/demand technicals, real money was a better seller; fast money was mixed, while servicers also sold. This was the case even as some key economic reports were weaker than expected, leading to a rally in Treasuries as investors turned risk averse.
Next week, however, there is potential for a more supportive tone to the market. Fed Chairman Ben Bernanke will present his semiannual report to Congress and this could provide an opportunity for MBS spreads to tighten, assuming his remarks continue to favor an accommodative stance, which would seem likely, especially given the fears and risks of the looming sequestration.
Further providing a more favorable bias are the traditional monthly events that tend to be supportive for the sector. The first is month-end index buying on Thursday. Barclays MBS Index is projected to extend 0.11-year on Mar. 1 which is slightly longer than the February monthly average of 0.08-years.
Then on March 6 investors will find out the amount of paydowns received from their MBS holdings that occurred in February. IFR Markets estimates $129 billion will be available for reinvestment in the sector. Release of the employment figures tends to lead to a decline in volatility, which benefits mortgages as well; the February report will be released March 8. Finally, the 8th is also Class A (30-year FNMA and FHLMC) 48-hour day where pool information is exchanged as settlement approaches four days later.
The QE uncertainty and forthcoming testimony from Chairman Bernanke kept MBS volume below normal at an average of 84% for the week through Thursday, based on Tradeweb's experience. Last week, volume averaged 100%.
Supply technicals were uneventful, with mortgage banker selling averaging less than $2.5 billion per day. The New York Federal Reserve, meanwhile, reported gross and net purchases of $15.0 billion in the holiday-shortened week ending Feb. 20, which equated to an unchanged daily average pace of $3.8 billion.
In other mortgage-related activity, dollar rolls were mostly lower on 30-year FNMAs; 15s lagged 30s over the week, while GN/FNs declined. Activity in specified pool trading picked up with over $3 billion in bid lists consisting of loan balance, high LTV and other call protected paper. Payups remain pressured on supply and limited demand.