MBS are down -8/32 (FNMA 30-yr 3.0 at 103.00), around 5/32 below morning levels, and near the low for the day. Unfavorable repricing has been seen. Comments from Fed Chair Yellen (see below) caused MBS to fall this afternoon. Consumer Sentiment declined to 87.9, well below the consensus of 92.0, and the lowest level since September 2015. The Dow is up 40 points. For the week, MBS prices fell about 10/32.
In a speech this afternoon, Fed Chair Yellen surprised investors with a potential new twist on U.S. monetary policy. Yellen put forth the possibility that a “high-pressure economy” may be the best approach to repair the damage done during the financial crisis. This would involve waiting longer in the business cycle than in the past to raise the federal funds rate. She acknowledged that this approach would run the risk of inflation rising above their 2% target level. Some of the hoped for goals of this twist for longer loose monetary policy would be to encourage business investment and to increase the number of workers who return to the labor force. The possibility of Fed policy which tolerates higher inflation caused long-term bond yields, including MBS, to rise.
Looking ahead, the next European Central Bank (ECB) meeting will take place on Thursday. Any guidance on future monetary policy could have an impact on global markets. In the U.S., Industrial Production will be released on Monday. The Consumer Price Index (CPI), a widely followed monthly inflation report, will come out on Tuesday. CPI looks at the price change for goods and services which are sold to consumers. Housing Starts will be released on Wednesday, and Existing Home Sales will come out on Thursday.