Phil Grossfield's Blog

Bonds Tank After Early Gains. The 30-year Fannie Mae bond was up +70bps this morning and then sold off and has dropped down almost to the opening point. We lost -50bps since rates were published. Moreover, Interbank issued 4 reprices for the worse…it’s rare to see 4 in a row…I think I know why.

Please note, before I begin, I will not be including the Washington D.C. shootings in my analysis…I’m still trying to get a handle on that news, and how it might affect the market.

First, the air is thick, like butter thick, with the pending Fed monetary policy decision coming on Wednesday. Pretty much everyone expects the Fed to announce QE Tapering which will decrease the amount of bonds the Fed buys. In my opinion, even though everyone knows the Fed is going to announce tapering, traders are still ready to sell off bonds on the news. I am hoping, praying, that the Fed announces a mild and tempered policy of tapering. My hope is that traders will not sell off bonds in force on the news. Remember, when traders sell off bonds, the price drops and our rates worsen.

Second, traders aggressively bought bonds this morning presumably on the news that Larry Summers pulled himself from consideration to replace Bernanke as the Fed chair. However, I believe the amount of trading this morning was more than would have been expected. So, the higher trading resulted in a very high bond price, higher than normal if you will. And since traders like to buy low and sell high, and since they know the price will likely fall soon with the Fed announcing monetary policy, they sold off to take the gains. Put another way, having such a high bond price this morning was like putting a juicy steak in front of my friend Barry…he would stare intensely, growl and pounce.

Third, the military response to Syria is essentially on hold. Since the threat of military action isn’t imminent, traders are not deterred from investing in stocks…and bonds indirectly would suffer as a result.

Fourth, I think the technical signals for bond trading were getting a little scary for a Capital Markets department. As you can see from the graph, the bond went up +70bps early this morning as it neared Ceiling 3, and then it dropped all day and eventually fell through Floor 2. The next floor down is the Lobby and Capital Markets did not want to take a chance on the bond falling so low. So, I think they repriced 4 times for the worse simply to protect themselves…a damage control strategy.

In my opinion, the only hope for a stabilized bond price, and therefore subsequent stabilized lender rates, is to hear a mild statement on Wednesday from the Fed regarding QE tapering. Ideally the Fed would back away from QE tapering altogether which would result with a huge bond rally…rates would improve dramatically. I’d say the chances of that happening are at least as good as me winning the CA State Lottery on Wednesday and becoming a millionaire with a private jet…IT COULD HAPPEN, but I need to go buy a lottery ticket first. Even more likely is the hope for a mild statement on QE tapering that gives traders the impression that QE is here to stay in good force for many months to come. This would give traders a good reason to buy bonds which would help rates tremendously. But what we do not want to hear is a statement from the Fed that they have decided to significantly taper QE starting immediately. This would be devastating for bonds and our rates, and many think this is exactly what is going to happen. I choose to think positive…I’m going to go buy a lottery ticket.

For tomorrow, I wouldn’t be surprised to see a minor improvement early in the morning and then a similar sell off as the day goes on. I’D LOVE SOME FEEDBACK…please let me know your thoughts…..

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QE Tapering Explained – For my explanation QE and tapering, read my QE analysis from an earlier post.

LO Comp, Ability To Repay Qualified Mortgages. Here is Fannie’s announcement about ATR – Ability To Repay, QM – Qualified Mortgages, and the new compensation rules: Fannie Guide Announcement. And here is a video by the Consumer Financial Protection Bureau – CFPB explaining Qualified Mortgages and Ability To Repay guidelines :