MBS are up 81 bps this morning. Though it’s been bouncy around this range. After 2 days of early wins, I’m wondering if the Angry God that Hates Mortgage People went on vacation.

Despite the announcement of a Fed/Treasury/FDIC backstop for SVB and Signature Bank, financial markets are trading as if current events imply a sea change for economic momentum, inflation, and the Fed rate hike trajectory. It’s pretty much that simple. Turmoil continued to engulf shares in regional banks as investors who saw equity stakes wiped out at Silicon Valley Bank and Signature Bank rushed out of the industry. Regional lenders occupied six slots among the 10 biggest drops in the US premarket:

* First Republic Bank sank more than 60%

* Western Alliance Bancorp lost 52%

* PacWest Bancorp was down 38%

* Comercia Inc. slid 14%

* Customers Bancorp dropped 13%

* Zions Bancorp was off 12%

The Fed Funds futures are now handicapping a 48% chance of no move in March and a 52% chance of only a 25 basis point hike.

FWIW,many think the Fed anticipates that these bank failure will restrict credit in the banking sector, which will have a similar effect to rate hikes. In other words, they won’t need to hike the Fed Funds rate as much going forward because the bank failures are doing the work for them. We are seeing the flight-to-safety trade this morning as investors pile into sovereigns and MBS

The 2nd and 3rd largest bank failures in history have happened over the past 3 days.  Markets reacted in a logical direction.  If anything, the drop in rates was made bigger by the fact that the market is searching for evidence that it’s time for the Fed to dial back its hawkish rate policies. That’s what today ended up being mostly about: the market betting on a MUCH lower rate hike profile in the coming months (and rate CUTS starting in a few short months).  Between Tuesday’s CPI data and next week’s Fed announcement we’ll have the data we need and the requisite amount of cooling-off time to have a much better sense of what the road ahead looks like.

Market expect +.4% on CPI tomorrow.

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