MBS Day Ahead: Paradoxical Reaction Potential For Today's Fed

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Posted To: MBS Commentary

In trying to put together a chart for this morning, I kept running into a wall. It had to do with the likely outcomes associated with different Fed forecast scenarios today. To keep things simple, the 2 scenarios I'm considering are "friendly Fed" (i.e. rate hike outlook less aggressive than expected) and "unfriendly Fed" (vice versa). The paradoxical conclusions have to do with how rates will react to either scenario--especially if we're trying to predict the reaction for both longer and shorter-term rates. At first glance, we would expect a friendly Fed to put downward pressure on both ends of the curve (i.e. 2yr and 10yr yields fall together), and indeed, that's highly likely to be the case. This is the less variable of the two scenarios. But what about a...(read more)

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