Mortgage Market Special Report 05-28-2009

We apologize for the lack of reports the last two days, but hopefully everyone locked last Thursday or Friday in advance of the historic drop we saw yesterday in mortgage backed securities (MBS).  Though we had predicted a pull back from the highs reached last week, no one could have predicted the -175 bps that were lost yesterday.

After trading in a tight channel for the last two months, it was inevitable that bonds would come off these highs.   With the positive news on consumer confidence and existing home sales, we are seeing a beginning of belief that the economy is final showing small incremental gains even within the most dismal of reports.  Add to this a very real fear of future inflation with trillions in Treasuries and the continued need to print large amounts of money.

The yield between Treasuries and Mortgage Backed Securities has slowly been getting much tighter in the past week.  Treasuries are the safest investment available, but they do not pay as much as other vehicles.  MBS are safe, but with the issues in the housing market, they have become less attractive.  Add to this a smaller difference in the yield, and traders in a flight to quality, placed their money in Treasuries rather than the slightly higher risk mortgage bonds.

Many are wondering and speculating that the Fed will step in to rescue MBS with further purchases.  Unfortunately, the government is out of money, and to make up for the short fall, they will have to auction off more Treasuries.  So in essence, in order for them to have the ability to purchase more mortgage bonds they will be forced to sell more Treasuries.  This will further weigh on MBS, and will eventually lead to inflation.

All this being said, it is very doubtful that pricing will get back up to the levels we saw over the last two months.  We will see some spikes and windows that will lead to lower rates than current levels.  Still, the damage has been done, and those hoping to get back down to the 4.5% range will certainly be disappointed.

We did see a little bounce today, which should be expected after such a dramatic drop in mortgage backed securities.  The Fannie Mae 4.5% bond closed up 34 bps on the day.  Hopefully this can be sustained going into tomorrow’s trading.  Of course, everything is a gamble as witnessed this past week.

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Mortgage Market Update 05-22-2009

What a difference a day makes!  As stated in yesterday’s post, bonds were ripe for a pull back, and that they did!  Mortgage Backed Securities (MBS) dropped over -41 bps, which took us back to the bottom of our trading channel.  This resulted in  a rate deterioration of .25% to .375%, depending upon the lender.  We have stated over and over that these windows of opportunity in pricing only last for short periods.  Given the technical signs in the bond chart, we had to expect some type of reversal.

Why did the market fall so sharply?  It was all do to the yield spread between Treasuries and Mortgage Backed Securities.   Over the last two days, the spread in yields between these two safe havens have tightened, making the increased risk of MBS less attractive to investors looking to park their money before the long weekend.

The bond market will be closing today early and will also be closed on Monday in observance of Memorial Day.  With that said, trading should be pretty light today.  Mortgage Backed Securities are sitting right at their floor of support, so for now we are carefully floating with hopes that the market can make a bounce higher come Tuesday.  Enjoy your extra day off!

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Mortgage Market Update 05-21-2009

Yesterday, Mortgage Backed Securities were able to make a run above above their current trading channels after the release of the FOMC minutes from April that indicated a protracted recession and a lower fear of eventual inflation.  Mortgage bonds were able to post a 24 bps gain on this news prior to the market close.

Initial Jobless Claims came in slightly higher than expectations this morning, with a loss of 631,000 jobs, but it was better than last week’s reading of 643,000 losses.  On the other hand, the number of people continuing to claim benefits rose for the 16th straight time and hit a new record high since 1967.  Obviously there is still much weakness in the labor force, which will continue to hold the economy back from any real recovery.

The Leading Economic Indicators came in slightly higher than predicted, rising by 1%.  This is encouraging, as it is the first time that strengths among its components surpassed any weakness.

Currently, Mortgage Backed Securities are pretty much flat on the day.  Like last week, we are now just above a very formidible ceiling of resistance.  From a technical standpoint, bonds are ready for a slight pull back.  Thus it is our position to lock on your morning rate sheets as the downside far outweighs any positives.

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Mortgage Market Special Afternoon Update 05-20-2009

The Federal Reserve released the minutes from their last meeting shortly ago.  Though some of the news was positive, the general message is that they see the economy improving, just not as quickly as previously expected.  Here are some of the key highlights that traders are focusing on:

1. The GDP Forecast was cut again from -1.3 to -2.0, signaling further contraction.
2. The Unemployment range increased from previous projections of 8.3% – 8.8% to 9.2% – 9.5%.
3. The Core Personal Consumption Expenditure index (PCE) was revised upward from .9 – 1.1 to 1.0 to 1.5.
4. Few saw an increased risk of inflation, and most expect inflation to be low for the next couple of years.
5. The economy continues to face downside risks.

Mortgage Backed Securities (MBS) have shot up 21 bps directly after this release, as most of the information pointed towards a low risk of potential inflation in the near future.  We should see some lenders re-price for the better, while some will wait to see if traders’ sentiment can hold through tomorrow’s market opening.  For now we can comfortably float to see if we can capitalize on these gains.

Here is a link to the actual report:

http://www.federalreserve.gov/monetarypolicy/fomcminutes20090429.htm

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CITIES ON THE HOUSING MEND

Mortgage Market Update 05-20-2009

After closing slightly in the positive yesterday, Mortgage Backed Securities are again up this morning and pricing at the top of the their current trading channel.  There is little in the way of economic reports  today, but the Feds will be releasing the minutes from the last FOMC meeting.  This could have the potential to influence investor appetites, so we will be watching this closely to see exactly how it will effect bond trading.

Currently, mortgage backed securities are up 6.25 bps on the day.  As mentioned above, bonds are at the top of the trading channel with only 14 bps more to gain.  On the other hand, there is a potential -29 bps on the down side before pricing hits its current floor of support.  That being said, the risk obviously outweighs the potential rewards so a conservative locking stance might be the best recommendation.

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Mortgage Market Update 05-19-2009

Mortgage Backed Securities dropped heavily yesterday following a solid week of gains last week.  Hopefully, you took our advice Friday, and you locked your pipeline.  As we stated, the bond was ripe for a pull backed given the technical signs shown in the bond charts.

Mortgage bonds are being helped this morning on weaker than expected housing data.  Housing Starts tumbled by 12.8% last month, which is the worst level in over 50 years.  In addition, Building Permits fell as well in April much more than analysts expected.  This is actually good news for the housing market, as this reports show that we are not putting further strain on inventory levels.  In order for the market to find a true bottom, the existing inventory of homes for sale must decline.

Not surprisingly, Homebuilder Sentiment rose for the 2nd straight month.   The Housing Opportunity Index, which measures consumer’s purchasing power, rose as well to its highest level in 18 years.  Those in the housing markets are hoping these reports are a signal that we are closing in on a bottom, though it will take some time to get there at this pace.

Currently, Mortgage Backed Securities are flat on the morning, and they are off of earlier highs.  For now we are going to float cautiously to see if pricing can rebound from the losses experienced from Friday through yesterday afternoon.  Most of the damage has already been done, so we are optimistic of a small rally.

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Mortgage Market Update 05-15-2009

Mortgage Backed Securities (MBS) gained 9 bps yesterday, which is the fourth straight day to post increases.  Bond pricing is now at just above the current trading channel.  This could signal an eminent pull back, as investors capitalize on their profits.

The Labor Department released their Consumer Price Index (CPI) this morning, which came in pretty much flat and at expectation.  Year over year, consumer prices have dropped .7%, which is the largest decline since 1957.  Also, Industrial Production fell in April by .5%, which was pretty much in line with the .6% predicted.  Overall, these reports indicate that the economy continues to contract, just at a slower pace.  Though these types of reports can signal deflation, those fears have been minimized by the aggressive actions taken by the Federal Reserve.

On the bright side, consumer confidence rose to 67.9 from 65.1 in April.  This is important, as it will take a big swing in the general public opinion of the health of the economy to help spur on recovery.  With falling prices, it is only a matter of time when consumers start spending their money again since their purchasing power is getting stronger.

Currently, MBS are slightly down on the day.  From a technical standpoint,  bond prices have poked just above the current trading channel for the last 3 days.  In the past five months, pricing has never been able to stay at this level for more than three days before falling lower.  The retreats have been pretty quick, so there is a good chance for mortgage backed securities decline.  Thus, it is our recommendation to lock today, as the potential for gains are much less than the potential for losses.

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Mortgage Market Update 05-14-2009

Mortgage Backed Securities (MBS) are pretty much flat on the day, despite an otherwise bond friendly Initial Jobless Claims report.  Mortgage bonds made a modest gain of 9 bps yesterday, but that was off of the 22 bp high.   This current trading channel is proving to be quite strong, which has helped to stabilize MBS.

Initial Jobless Claims rose to 637,000 last week, which was much higher than expected.  This was a complete reversal of last weeks reading of 605,000.  Also, the number of people continuing to receive unemployment benefits climbed for the 15th straight week, signaling continued weakness in the labor markets.  Surprisingly, many investors have shrugged off these reports this morning, as those numbers are still lower than the peak reached in March.

The Labor Department released the Producer Price Index (PPI) as well this morning, coming in better than expected with an increase of 0.3%.   Even with this gain, the  year over year Core PPI has fallen by 3.7%.  This could create anxiety over potential deflation, but most economist agree that the actions taken by the Federal Reserve thus far should prevent this from happening.

With mortgage backed securities sitting at the top of their trading channels, we are carefully floating to see if we can break above the ceiling of resistance that has been holding bonds back for the last two weeks.  Should bonds pop above this level, pricing could get much better.  Of course we will keep you posted of any developments.

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Mortgage Market Update 05-13-2009

Wow!  What a change in sentiment from last week.  The stock market is down and the mortgage bond market is up following a much worse than expected Retail Sales report this morning.  Many people were hoping that the recent improvements in the labor force would translate to higher consumer spending.  Obvoiusly this is not the case, as people are holding on to their money and the savings rate continues to climb.

Retail Sales fell .4% last month, which was much worse than the flat reading that most economists and traders expected.  This follows a revised 1.3% drop in March.  Doubts are again surfacing about the economy’s recovery, as a rise in consumer demand is necessary for us to see an end to this recession we have been in since December of 2007.

Also weighing on the markets was the release of the Commerce Department’s Business Inventories report, which showed a decline of 1%.  Though this was in line with expectation, given the retail sales numbers that number could increase in the near future.

Currently, Mortgage Backed Securities (MBS) are up 12 bps on the day, but off of earlier highs.  Bonds are at the top of their current trading pattern, which could signal an eminent pull back.  The prudent move would be to lock your current pipeline to take advantage of recent gains.  On the flip side, should mortgage bonds break above the current ceiling of resistance, we could see some great pricing ahead.  As always, we will keep you posted of any major developments.

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