Following an impressive nonfarm payrolls print in the first week of the new month, the second week of December held another round of key events for investors, with the highlight being the mid-week Federal Open Market Committee meeting with expectations of a QE4 announcement.
Indeed, the Committee did not disappoint. It announced it would begin a program of purchasing longer-term Treasuries at an initial pace of $45 billion per month beginning in 2013 following expiration of Operation Twist at the end of December. It also reaffirmed its policy of buying $40 billion per month in Agency MBS, as well as, reinvesting paydowns from its Agency MBS and debenture holdings back into MBS. "Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative," the Committee said in its statement.
In addition, the Committee said it would keep the target range of the federal funds rate at 0 to 1/4 percent "at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored." Based on their revised Summary of Economic Projections, their outlook indicates the unemployment rate won't fall below 6-1/2 percent until 2015.
MBS spreads had been tighter heading into Wednesday's statement; however, the news served to back-up rates with the 10-year note yield rising to 1.699 percent from 1.649 percent. This led to a late day pickup in mortgage banker supply, as well as, active profit taking from real and fast money with spreads closing off their intraday tights of 5 to 6/32nds.
Another highlight for the week was Class A 48-hour day on Monday and rolls were roiled all day with lower 3.5s spiking 8/32nds higher in both FNMAs and FHLMCs. To help alleviate the shortage of settlement bonds for the front month of December, the Fed sold $6.75 billion of those rolls (rolled forward).
Meanwhile, higher coupons were pressured on a news report that the White House is putting together a list of names to consider for replacing acting FHFA Director DeMarco. Since President Obama's re-election, this has been an expectation as DeMarco has resisted more aggressive actions for helping credit-impaired borrowers refinance, including through principal forgiveness. Still with higher level positions to fill including Treasury secretary, secretary of state and SEC chairman, replacement of DeMarco has been seen as further down the line, but it could be sooner than anticipated.
Mortgage banker supply averaged about $3.2 billion per day which was up a bit from $3.0 billion last week. Meanwhile, the NYFRB reported its net purchases held at an equivalent of $3.7 billion per day. While supply/demand technicals remained broadly supportive, bouts of profit-taking did lead to temporary imbalances. Given the strong technical outlook, however, banks, real estate investment trusts, and fast money tended to be responsive to supply-induced and price cheapening opportunities.
In other mortgage-related activity, 15s outperformed 30s in lower/production coupons and lagged in higher ones while GN/FNs were narrowly mixed along 3.0 percent through 4.5 percent coupons. Trading in specified pools appeared to be on the quieter side despite some recent softening in payups. Demand though remains strong for most call-protected paper although higher loan-to-value MHA pools have been pressured. In remarks included in recent research from Barclays, MBS analysts said it "has been driven by a combination of higher realized speeds and perceived greater policy risk."
The week's events contributed to higher volume in MBS with Tradeweb averaging 111 percent through Thursday compared to 103 percent last week. Excess return to Treasuries on Barclays MBS Index for the week through Dec. 13 was +19 basis points which brought the month to date return to +20. The 30-year current coupon yield rose to 2.297 percent from 2.235 percent with the spread to 10-year notes tightening to +57 from +62.
