Fixed income traders went “palms out” (sellers) on rumors that the Fed is going to raise the discount rate for the second time this afternoon.  So far, the Fed has refused comment.  Once the rumor made its way through trading pits, huge volume spikes were seen in 10 year note put buyers (buying options that benefit if the market trades to higher yields), libor rates jumped, along with large sellers of Eurodollar strips.

The London Forex is talking about the Fed’s announcement, commenting that if it happens, timing will be today at 4:30 est.  MBS are now off 5/32’s and the 10 year note is down 7/32’s.  Trading has steadied out albeit at the worst levels of the day.

“If” the discount rate happens, we would expect a further back up in mortgage pricing (worsening) and traders changing their mindset to one of pricing in a Fed Funds rate hike in June.  All seems a bit premature to me.  I would recommend that borrowers stay defensive into the day’s close.