What Happened Last Week
What’s Up with Friday’s MBS Volatility?
Mortgage backed securities (MBS) prices suffered from two infrequent sources of volatility Friday. The first was easier to pinpoint and understand as it resulted from the regularly-scheduled settlement process. In fact, this is really only optical volatility. The other source of volatility was more confounding. The problem, in a word, was illiquidity. It results in huge moment-to-moment swings in bid prices but only one side of the swing is in line with actual trades. Unfortunately, the entire bond market lost ground heading into the afternoon and several lenders ended up repricing for the worse.
Source: Matthew Graham,
Mortgage News Daily 12/10/21)
What’s on the Agenda for this Week?
Overview
This is a monster week, and Wednesday’s FOMC taper schedule will get the most weight among MBS traders. What will they need to say for MBS pricing to improve? Get Worse?
Three Things
The three areas that have the greatest ability to impact MBS backend pricing this week are: (1) Central Bank Palooza, (2) Covid and (3) Inflation Nation.
(1) Central Bank Palooza: This is a very pivotal week for global policy as key decisions are issued from Switzerland, Japan, Great Britain, the European Central Bank and the United States. About a month ago, it was expected that the Bank of England may be willing to raise their interest rate but that expectation has dissipated over the past couple of weeks. The ECB will be watched for more guidance on the bond buying program which was supposed to end but now may be kept alive a little longer. For our own Federal Reserve, the FOMC will conclude their meetings on Wednesday. This is one of those meetings that will also have their Economic Projections which includes the “dot plot chart” which by itself could have as much impact as any action that they take. Specifically for MBS pricing, experts are very eager to see their bond purchase schedule for January and beyond. During their last meeting, they only published their schedule through the end of December which was a decrease of $5B in MBS purchases for November and December. Do they keep that same rate of reduction in January and February or do they increase that rate to $10B?
(2) Covid: The concern over another round of supply-chain-crippling-lockdowns has been a major factor in MBS pricing since Thanksgiving. UK’s Prime Minister Boris Johnson said to expect a “tidal wave” of infections by Christmas. China has confirmed an Omicron case and has already started shuttering some factories in a province. The markets are also reacting to various studies on the efficacy of current vaccines on the latest variant.
(3) Inflation Nation: There will be some very key inflationary data this week. Front and center will be Tuesday’s Headline PPI which is expected to reach 9.2% on a YOY basis. There will be Import/Export Prices as well.
On Deck for Tomorrow
FOMC starts two days of meetings, PPI, Core PPI.