Just when we thought the mortgage bond market might take a breather from its dramatic slide, mortgage backed securities (MBS) continued the carnage from the previous week posting a whopping -267 bps by Friday’s close. The decline in pricing has caused rates to increase by a full percentage point since this same time two and a half weeks ago. Though an increase in rates was unavoidable, no one foresaw how quickly it occurred.
There were a couple of factors that created this downward spiral. First, many of the economic indicators reported in the last three weeks have either been positive or they have not been as bad as was generally expected. This indicates that the economy is slowly gaining strength, which is encouraging but not great for mortgage rates. Secondly, Mortgage Backed Securities have had increasing competition from Treasuries since they are paying better margins. In addition, the added supply of Treasuries continues to weigh on any gains in MBS.
With the drop in MBS, traders have switched their focus from the 4.5% coupon to the 5.0% coupon. This is significant, as it indicates that a new trading channel is being established. Unfortunately, this also signals that mortgage rates will not likely back down to the levels seen previously any time in the near future. Though pricing is a little higher, one also has to realize that any rate in the 5% and 6% range is still historically low in comparison. It will take some dismal economic reports to realize any real gain in pricing, and this week is chalked full of reports. Of course, we will keep you posted of any changes.
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