Yellen’s Dovish Stance

Good morning everyone! I hope you had a great MLK weekend.

Mortgage Backed Securities ticked up this morning probably due to Janet Yellen stating that the $1.9T stimulus bill proposed by President Elect Biden is not big enough. Regarding monetary policy, people fall into two camps – doves and hawks. Similar to being republican or democratic, the solutions to monetary policy proposed by doves or hawks are fundamentally different. Hawkish people tend to protect the country from high inflation by rate hikes. Dovish people tend to care more about GDP growth, unemployment , job growth, etc., sometimes are the expense of inflation. Janet Yellen, during her time at Fed Chairman, was largely a dove. Now that she is the incoming Treasury Secretary, she is continuing her dovish stance – thinking that more stimulus will help other facets of the market preform, disregarding inflation. We can expect to see more inflationary stimulus proposed by Janet Yellen as our economy continues to recover.

We talked last week about the record Panic / Euphoria reading of 1.83 – over 4x the “euphoric market” level. After Yellen’s statement, it jumped over 2.00 – 5x the “euphoric market” level. As we have said in the past, these record breaking euphoric levels point to a pull back; however, the optimism of this market has not failed to surprise any economist.

Mortgage Backed Securities now sit in a large trading range. Although we have seen stability in the last few days compared to the beginning of last week, we are holding a locking bias as any news regarding Biden taking office has the potential to create volatility for MBS.

Have an awesome day.