Austin Mortgage Blog

Archive for January, 2009

Expect mortgage rates and pricing to hold steady (at current levels)

4th Quarter GDP fell 3.8%, the slowest quarterly pace in 27 years.  The number however, was better than market expectations of minus 5.5%.  The drop was due in large part to another sharp decline in consumer spending.  Business investment was also down, falling 19.1%.  

The Employment Cost Index was also released, up .5%  and up 2.6% for the year ending 2008, the slowest pace since 1975.  Month-end buying is helping the long end of the yield curve and helping mortgage-backed securities for that matter as current coupon FNMA/GNMA are up 2 to 3/32’s.  

Just released, the Chicago Purchasing Mgrs report fell 1.8 points to 33.3.  A reading above 50 signals expansion while a print below 50 points to business contraction.  The production component within this index was an eye-opener, falling 29.7% — the worst in nearly 30 years.  

The Fed has been in the market as well, purchasing 1.7 billion of GSE paper (MBS).  Not much, but it is supportive for mortgage pricing and rates.  Technically, the buying this morning has approached the overhead resistance at the 2.75% yield mark where sellers re-entered.   Yesterday, that level was supported, but once taken out (when we traded to 2.90%), the level now becomes resistance.  

The response (selling) tells you that the bears are still in control, but very close to the channel bottom at 2.93%.  Given stocks are floundering, off 93 on the Dow, and the economy is still on life support, expect mortgage rates and pricing to hold steady (at current levels) and try to improve as we enter a new month.

Traders refer to this kind of a day as ‘blood in the street”

No place to hide in the market today. 

Mortgage backs down 31/32’s, 10-year note down 1 and 7/8^th points, and the Dow off 228. Traders refer to this kind of a day as ‘blood in the street.”  Today, Mortgage Market Guide’s Barry Habib makes a great point about the Fed’s involvement in purchasing MBS and how it may do little to bring back the 4.50% note rate that many borrowers are lusting for. 

Along with this, the Fed was indeed in the market today, buying mostly 5.50% coupon.  This purchase has done nothing to help lower interest rates. 

New York Fed purchases $16.8 billion in agency mortgage-backed securities

Let’s hope for a better day tomorrow.

Feds Balk, Market Walks

Rational market behavior is not the theme for today.

• Economic data was downright nasty, yet bonds and mortgage backs are both in the red. 
• Weekly Unemployment Claims hit the tape up 3K to 588K while Continuing Claims rose to record highs.
• Durable Goods orders were no better, falling 2.6% and excluding transportation, dropped 3.6%. We need to go back to 2002 to match that print.

Part of the atypical trade can be blamed on the following:

• 30 billion of 5-year notes coming to market, 
• Leveraged accounts selling into the long end of the treasury curve, 
• Mortgage originator/servicer selling into month-end production. 

Others seem to still be crabby about yesterday’s FOMC statement not going far enough to help the credit markets. Call it the “Feds Balk, Market Walks.”

With no pre-commitment to buy treasuries, traders do what traders do. Sell. Unfortunately, they are taking mortgage backs right along with them. Currently, the 10-year note is down 27/32’s (yield 2.75%), mortgage backs down a smooth ½ point, and stocks off 178 points on the Dow. Technically, we’re just testing the bottom of the range with the market needing to make a stand right here (2.75% to 2.80%).

Given the sour economic backdrop, we would expect the market to hold and make a comeback into next week. If we are wrong, the pain will be another point to the downside for the 10-year note (channel bottom) and at least ½ point of additional punishment on mortgage pricing.

Main focus for the markets: FOMC statement

The FOMC statement was the main focus for the markets today, with the long end of the treasury curve and mortgage backed securities taking the brunt of the selling after the release. 

Word has it that the lack of commitment by the Fed to buy long-dated treasury issues sparked the selling, even though the statement verbatim said:

The focus of the Committee’s policy is to support the functioning of financial markets and stimulate the economy through open market operations.  The Federal Reserve continues to purchase large quantities of agency debt and mortgage backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchased and the duration of the purchase program as conditions warrant.    

The bottom line here is the Fed will do anything within its power to grease the wheels of the credit markets.  Given the text, I think both treasuries and MBS overreacted.  With the Fed being the A player, we do not expect mortgage rates or treasury yields to go much higher.  Technically, the trend has been bear one day, bull the next.  Bears won today and could take the market to the bottom of the channel line at a yield of 2.73% (currently 2.66%).  2.73% should put the brakes on the selling and start a new trend towards lower yields and better mortgage pricing. 

Hang in there.

Fed kept the target funding rate unchanged

Touting a significant Global slowdown, the Fed kept the target funding rate unchanged.  In the policy statement, the language concerning the purchase of Agency paper (MBS) remained unchanged.  They did however, open up the possibility of buying treasuries to keep interest rates stable.  Fast markets exist with mortgage back securities down 3 to 5/32’s, stocks up 220 on the big board, and the 10-year note  sliding, down 38/32’s at a yield of 2.64%. 

Be careful out there.

Fed talk of good bank, bad bank scenario sends Dow up 128 points

Day two of the Federal Open Market Committee meeting is upon us with results/policy statement due out at 1:15 pm CST.  The Fed is expected to stand Pat with the potential to announce the addition purchase of treasuries and/or other consumer-backed paper (credit card debt, car loans, etc.).  Talk on the street has also surface about the good bank, bad bank scenario where the Fed would set up a bad bank to quarantine the toxic assets on the good banks balance sheets.  The “talk” has lifted stocks, especially bank stocks as the Dow is currently up 128 points.  

Mortgage backs are treading water into the FOMC, currently down 1/32nd on most coupons.  The 10-year note is off 7/32’s, trading at a yield of 2.54%.  

Expect a steady trade with volatility picking up once the announcement and policy statement hit the tape.

Expect the tight-range trade to continue

A quiet, yet positive trade has developed today with month’s end and nasty weather setting in. Earlier this morning, S & P Case Shiller Home Price Indices continued to set new record lows as the 10-City Index fell 27% and the 20-City Index fell 25%. Phoenix and Las Vegas posted the largest declines, year-on-year of 33% and 32%, respectively. Miami, San Francisco, Los Angeles, and San Diego followed with declines between 26% and 31%. Dallas and Denver were the best of the worst, but still posted record-month declines. All 20 cities posted yearly price declines.

Consumer Confidence for January was also released, falling to 37.7, a new record low. Rising unemployment seems to have displaced any confidence we might have gained when the Obama administration took over. Looking to the positive, the FOMC has started day one of their two-day meeting; no doubt talking about how to finance the stimulus package(s) and how to help grow the economy.

With the Fed Funds target rate at zero, the Fed will need to use more “aggressive” tools to stabilize the economy. Watch for the policy statement tomorrow at 1:15 p.m. CST. It will tell the tale of the tape. Just got a tip that the Fed is in-buying 1.7 billion of our paper. Look for a price change for the better. Other than that, the market is too fragile to move higher (mortgage rates), yet too over-bought to go lower.

Expect the tight-range trade to continue.

Existing Home Sales posting sales up 6.5% to 4.74 million units

Markets are mixed to start the week as stocks are positive and bonds/mortgage backs are not so positive. Early news on the economy was bearish as Caterpillar announced layoffs of 20K plus, Home Depot of 7K, and a few others pink slipped another 1K or more. Even McDonalds reported sales off 23% on a global basis. Forget about cutting the dividend, my nephews are worried about cutting the toys in Happy Meals. No doubt, the recession is effecting just about everyone.

Early trade had stocks off and bonds unchanged to plus a tick or two. Then Leading Economic Indicators and Existing Home Sales were released. Existing Home Sales caught the most attention, posting sales up 6.5% to 4.74 million units. The surprisingly positive release followed through as inventories fell by 11.7%. The only depressing number within the release was the median sales price which fell to $175,400.00. All regions of the country has positive gains with the exception of the Northeast, which fell 1.0%. Good news on the housing front yet traders are still apprehensive as one month does not make a trend.

Leading Economic Indicators surprised to the upside as well, rising .3% in December. Economists expected the print to fall .3%. In December, 5 of the 10 components has increases, the most since April 2008. Although the number looks good on the surface, once we strip out the effects of the money supply, the number would have been a minus .7%. The week ahead will be jam packed with data (see attached) along with 70 billion in Treasury supply (cash management bills through 20 year TIPS) hitting the auction block. Could give us a nervous, volatile week. Currently, the 10 year note is down 11/32’s, trading at a yield of 2.66%. Mortgage backs are off 4/32’s and stocks are plus 99 points in the big board.

Buckle up, could be a wild week.