Good Monday AM,

The MBS is up a bit this morning and the ten-year is flat. The Fed meets Tuesday and Wednesday and it is likely we will have mostly sideways movement until the policy statement is released at 11am on Wednesday. That’s not a bad thing after the whipping we took on Friday. Hopefully it will give us a little time to heal and reset expectations. Of course, there is always a possibility of some panic buying or even panic selling as we move closer to the meeting and traders try and anticipate the FED move. At this point the primary concern the market has is whether or not the FED will talk about SLR (Supplementary Leverage Ratio) and inform us he is extending it. The SLR is a cash reserve that banks must keep on hand as a percentage of their assets. The ratio for the bigger banks and investment houses is 5%. The Fed gave banks a break from this requirement last April because of the Covid shock to the system. That waiver expires at the end of the month. If the Fed does not renew that waiver, rates will jump. Some are calling for a 10-yr to jump by more than 100 bps.  Without SLR banks will be forced to dump as much as a trillion dollars’ worth of treasuries into an ill liquid environment. There are no buyers for treasuries, and this will get worse once the dumping begins. Additionally Chairman Powell will have to address inflation and the ten-year bond yield. The words he uses to talk about will either ease fear or multiply it. This upcoming Fed meeting may be the most significant of the past year.

Dan Rawitch shared that “Jay Powell was not blessed with the ability to use the right words at the right time. In his defense, OMG. He is boxed into a corner. Asset prices are inflated to record levels, even though long term rates are rising. If he does anything, he further inflates the bubble, which will ultimately pop. If he does nothing, the ten-year will rapidly rise above 2% and I can see a scenario which runs up to 2.4%. At that point, the bubble also pops. How the hell did we get here? Oh yeah, we have had a federal reserve for too many years that does not believe in free markets. The markets know what to do, they always have. It may not always be pleasant, but it was real and true and never swung too far. Now, it is a different story, and the FED must find a way out. My gut is that he extends SLR and says enough to comfort the market as to his pledge to keep long-term rates low. Let’s hope I am right!”

I guess the only thing left to mention is that with the $1.9T stimulus bill being signed into law, the blank stares in congress will now be directed toward paying for it. Dialogue has already started about raising taxes. Buy the popcorn now to watch the movie. You may not have enough money to buy it later on.

Floating is dicey in here.

Please remain safe and healthy. Make today great!