Market commentary

Wednesday was all about new makers. Moody’s downgraded Bank of America, Citi, and Wells Fargo, a move that surprised the equity markets and began the negative sentiment in the stock market. The House of Representatives voted down a bill to continue funding the government past the fiscal year end of September 30, setting up another possible showdown and creating additional uncertainty in an already fragile market.

Finally, the Fed again went all-in, announcing an active “twist” policy and jumping back into the mortgage market. While some had thought that the Fed might just alter its reinvestment strategy, the Fed went further by announcing that it will sell $400 billion in Treasuries maturing in less than 3yrs and use the proceeds to purchase maturities from 6 years through 30 years. Those purchases will be allocated to 32% 6-8yr, 32% 8-10yr, 4% 10-20yr, 29% 20-30yr, and 3% TIPs. The biggest surprise of the FOMC’s announcement was that the Fed will reinvest mortgage and agency principal payments into mortgage securities. While the dollars that such a move will direct into mortgage securities will not be that significant (estimated at around $15 billion to $20 billion per month for nine months), the move does signal both support for the mortgage market as well as a desire to facilitate consumer refinancings.

The markets reacted violently on this news as stocks plummeted and U.S. Treasuries soared, a pattern that is repeating itself this morning. The yield on the 10 year note fell to 1.87% and is trading at 1.77% this morning; a record low! Mortgage bonds rallied as well, gaining over 1.0% on lower coupons, while compressing prices on higher coupons.