Top of the Street: Central banks come back from summer vacation

The Fed and Bank of Japan this week set direction for the fall. The best of the latest research from the Street and beyond. Contributions this week from JPM, GS, Barclays, DB and the Fed.

Markets: The Fed and the Bank of Japan go on a double-date
The Fed may take a backseat to the BoJ this week, with the Fed on the fence and the BoJ likely to cut rates by 20 bp. JPMorgan and Goldman expect no action from the Fed on Wednesday, Barclays looks for a hike. JP and Goldman expect the Fed dots to still signal one more hike this year, which the market today gives a 58% chance. The press conference on Wednesday then likely sketches out the possible paths to higher rates. Both Goldman and Deutsche Bank expect a hawkish hold, with the Fed press conference signaling another rate hike this year. All agree that the Fed will likely continue cutting its view of how high rates may go in the long run. See JPMorgan’s US Fixed Income Weekly, 16 Sep 2016, Goldman Sach’s FOMC Preview: How Much is Really a-Changin? 16 Sep 2016, Barclay’s September FOMC Preview: Closer than you think, 19 Sep 2016, Deutsche Bank’s US Fixed Income Weekly, 16 Sep 2016. (JPM, GS, Barclays, DB, Milepost).

Markets: A few heavyweights on rates
When Tom Laubach and John Williams weigh in on interest rates, the Fed listens. And both lately have highlighted the continuing shift to lower long-term rates. The Fed researchers have used a model first developed in 2003 to track a steady fall in real US interest rates. Their latest work focuses on the impact of global factors, and they conclude that real rates have fallen in many countries for nearly a quarter century. They point to the challenge this creates for monetary policy of more frequent future episodes of zero or negative rates. The latest paper is here. 

Markets: The weakening impact of MBS hedging
The scent of higher interest rates has sent analysts scrambling to figure out if the hedging of MBS risk might affect other parts of the fixed income markets, but it looks like a false alarm. In 2003, when Fannie Mae and Freddie Mac owned and hedged nearly a quarter of outstanding MBS and when competition among originators made refinancing easy, volatility in other markets spiked when rates rose in August and investors rehedged. But today the agencies own less than 3% of the market and REITs, which also hedge, have seen holdings drop 40% from 2013 levels. Besides, it’s harder to refinance. See JPMorgan’s US Fixed Income Weekly, 16 Sep 2016. (JPM, Milepost).

Markets: A second act in MBS
Fannie Mae continues cleaning up after the 2008 financial crisis, and lately the agency has started selling MBS backed by modified loans – loans that had defaulted but then started paying again after Fannie Mae  lowered the interest rate, extended maturity or did both. The agency held $60 billion of these loans earlier this year. The relatively low and stable prepayment speeds in these new MBS have made them competitive with pools backed by small loans, which currently trade at high prices. It’s a new item on the specified pool menu. JPMorgan reviews the emerging sector in its US Fixed Income Weekly, 16 Sep 2016. (JPM, Milepost).