Austin Mortgage Blog

Archive for May, 2009

Fed Clarifies MBS Purchase Policy

As the pressure for higher mortgage rates has increased in recent weeks, investors have speculated that the Fed would step in to “defend” certain interest rate levels, but that hasn’t happened. This week, Fed officials explained that their mortgage-backed securities (MBS) purchases are designed to support the mortgage market and not to set rates. The Fed’s MBS purchases of $25.5 billion this week were similar to levels seen in recent weeks. Disappointed that the Fed hasn’t increased its quantity of asset purchases, investors sold MBS this week, and mortgage rates moved higher.

A number of factors have been developing which typically push interest rates higher. The coming supply of debt needed to pay for government programs will compete for investor funds. Despite strong demand for this week’s large Treasury auctions, investors are concerned that higher rates will be required in the future. In addition, an improved economic outlook has made investors more willing to move funds to riskier assets and away from safer assets such as bonds. It also means that higher inflation may be a concern sooner than previously expected.

The difference between short-term and long-term rates reached record spreads during the week. With the Fed-controlled fed funds rate close to zero, short-term rates remained low. Long-term rates, which are market-controlled and influenced by investor expectations, rose significantly. A wide yield curve spread is often found during periods when the economy is strengthening.

With the “game” being played out between the Fed (Quantitative Easing) and the market (inflation, fixed income downgrades, and potential treasury bubble) the outcome is unknown yet the stakes are high

As we close the book on a holiday shortened trading day, the picture looks much the same as yesterday.  Fears of U.S. debt being downgraded, following a similar fate in the U.K., has traders on edge with many sellers and not so many buyers.  The liquidity of all markets stinks as well, allowing traders to push it around with little resistance.  The 10 year note off 25/32’s (yield 3.45%) and mortgage backs down 7/32’s tells the story.  Stocks up 63 on the Dow has had little effect.  The selling today has helped to start a new bearish daily trend but will need to see continued selling to force a breakout.  If the market can hold between 3.46% to 3.50% on the 10 year note, a bounce (rally) would be in order.  We expect at least a counter trend rally just to relieve the oversold oscillators on our charts.  Best strategy is to take any rally early next week and sell it, using the float down to hedge your customers again an even bigger move (stealth rally).  With the “game” being played out between the Fed (Quantitative Easing) and the market (inflation, fixed income downgrades, and potential treasury bubble) the outcome is unknown yet the stakes are high.  Have a safe and stress free holiday weekend.

Continued selling in a thin market has taken the yield on the 10 year note right back to the highest level in months (3.37%)

Continued selling in a thin market has taken the yield on the 10 year note right back to the highest level in months (3.37%).  The selling has come out of thin air, with mortgage bankers selling supply into the down trade.  With Junior traders about to take the reins at fixed income desks, thin market volume, weak U.S. dollar, and treasury supply coming next week to the tune of 100 billion, traders are getting flat or short, unwilling to take any interest rate risk into the weekend. 

 

The chart supports this bearish condition as the 60 minute pattern has created an outside day down, always bearish in nature.  Currently, they are pounding the screen, down 1 and ½ points on the 10 year (3.37% yield, MBS down 17/32’s, and stocks down 178 points on the Dow.  Don’t expect a white knight until sometime next week.

Illiquid market trading is pushing the market around this morning

Illiquid market trading is pushing the market around this morning.  We started the day with the 10 year note up 8/32’s, trading at a yield of 3.17%.  However, within the last few minutes, traders have turned sellers in treasuries and mortgage backed securities.  Currently, we are off 17/32’s on the note (yield 3.26%) while MBS has slipped 7/32’s from the level we priced at. 

 

Fast market action with thin volume can and is whip sawing the price action.  Stocks have been down all morning, currently off 140 points on the big board.  If you open up the daily chart on the note, you can see the bearish trend line that has developed.  Every time we try to take it out on a rally, market forces sell it off.  This is not friendly to MBS pricing. 

 

Earlier today, Weekly Unemployment Claims fell 12K but Continuing Claims rose to a record high for the 16^th week in a row.  Normally, this would be a net positive for our pricing but in our opinion, the upcoming holiday weekend is responsible for illiquid, volatile price action.

Maybe a price change for the better in the making!

Just off the wire, the FOMC sees significant risk to the downside within the economy and at the same time, bumping their forecast of unemployment, now going to 9.0% to 9.5% and GDP coming in at minus 2% for the second quarter.  Their comments tried to be on the positive side but the numbers they provided do not follow suit.  Interesting.

 

Earlier today, stocks took the lead and rallied out of the gate.  Bonds and mortgage backs opened in the opposite direction, off 2 to 3 /32’s at the time most pricing was struck.  Since that time fortunes have changed with the FOMC comments aiding in our recovery.  Currently, stocks are up 32 points on the Dow and mortgage backs are plus 3/32’s, while the 10 year note trades at 3.19%.  Maybe a price change for the better in the making!

April Housing Starts fell to a new record low this morning, down 12.8% to 458K units

April Housing Starts fell to a new record low this morning, down 12.8% to 458K units.  The April decline was due in most part to a 42% drop in multi-family housing units.  Single family homes were not much better, falling to a record low 185K units.  The West had a good month, up 26.6% while the Midwest rose 14.3%.  The Northeast however slipped 13.6% and 4.6% in the South.  Building Permits did not escape the beating, falling to a record low 494K units. 

 

While we see a stabilizing housing market in the making, the time period to work off the inventory and regain its health will take the balance of this year at a minimum. 

 

After an early flurry, trading has gone quite with most markets hanging around unchanged.  The 10 year note is off 6/32’s (yield 3.24%), mortgage backs are off 1/32^nd, and stocks are up a nickel on the big board.  Trading volume is running at only 80% of the norm, giving us a preview of what “summer time blues” trading is all about.  Readings on our chart work have turned neutral/bearish on daily time frames but overall, we see the market at “value” will little movement either way.  For your reference, a close above 3.25% on the note (bad) or a close below 3.18% (good) will be needed to move the market.

Expect mortgage pricing to hold if we can stay below 3.25% on the 10 year note

It’s been a busy Monday in the market.  Stocks caught an early bid on the heels of some upgrades on financial stocks and a better than expected earnings report from Lowe’s.  The only news of the day came via the National Association  of Home Builders/Wells Fargo Housing Market Index which rose 2 points to 16.  Seems  as if homebuilder’s confidence is slowly creeping back into the market. 

 

After a flat opening in notes and mortgage backs, traders quickly turned sellers.  Currently we are feeling the effects of a 200 point plus rally in stocks, sending the 10 year note down 21/32’s (yield 3.21%) while mortgage backs are off 8/32’s.  We view the selling as more corrective in nature since daily chart studies still maintain their bullish bias. 

 

Buy signals on daily oscillators are good and trend signals are not active, adding further evidence to our consolidative/bullish lean.  The calendar this week is light with only New Residential Construction, FOMC minutes, and Weekly Claims to move the market.  Expect our pricing to hold if we can stay below 3.25% on the 10 year note.  Watch stocks as well.  Their direction will create an opposite reaction/direction for mortgage pricing.

Given the high profile data this week, mortgage pricing and note yields have done well

CPI, inflation at the consumer level, hit the tape unchanged on the “headline” number and up .3% on the core index (ex-food and energy).  The print was close to expectations with the core level just a touch higher than predicted.  Within the numbers:

• energy fell 2.4% (should reverse next month due to oil prices), 
• food prices fell .2%, 
• tobacco prices and personal services jumped 2.6%, 
• and real average weekly earnings rose .1%.  

Overall, not a bad report which reflects little inflation and no deflation.  Also on the wire, Empire State (New York) Manufacturing Index improved but still posted a loss of minus 4.5 points.  While conditions in that region are still worsening, the pace is beginning to slow. Industrial Production/ Capacity Utilization were also released, down .5% IP and 69.1% Cap U.  Nothing in this report tells us that the economy is on fire. 

Last but not least, the Michigan Sentiment Survey rose 2.8 points to 67.9.  Consumer expectations drove the number higher but the index of current conditions fell 2.1 points, giving us a mixed bag type of read on the consumer. 

Given the high profile data this week, mortgage pricing and note yields have done well.  Currently, the 10 year note is off 11/32’s (yield 3.15%), mortgage backs down 4/32’s, and stocks off 52 on the big board.  Technically, the chart has started to project a more neutral trade, especially if we can close at or below the 3.15% yield mark.  Stocks grinding sideways and luke warm economic data support our fixed income market being at or near “value”.  Keep in mind that this market is very tricky, trading on anything it gets its hands on so don’t fall asleep at the wheel.  Have a great weekend.

Retail Sales Decline

After several weeks of improving economic forecasts, weaker than expected economic data this week tempered some of the optimism for a near-term recovery, which was favorable for mortgage markets. Tame inflation data and sustained Fed purchases of mortgage-backed securities (MBS) also helped. As a result, mortgage rates fell moderately during the week.

 

With a full economic calendar, the biggest surprise this week was the unexpectedly weak Retail Sales report. Retail Sales account for about 70% of economic activity, and many investors were hopeful that the report would lend support to the idea that the economy is poised to turn higher. Instead, a moderate decline in the monthly data caused investors to question how quickly the economy will rebound. For mortgage markets, weaker economic activity is good news, since it generally means lower inflation. The monthly inflation reports released this week showed that inflation is not a concern in the short-term. The April Consumer Price Index (CPI) was unchanged from March, and Core CPI inflation rose at a moderate 1.9% annual rate.

 

The Secretary of the Department of Housing and Urban Development (HUD) announced this week that home buyers will be allowed to use the $8,000 first-time homebuyer tax credit for down payments on purchases financed by FHA loans. FHA will allow approved lenders, nonprofits, and government agencies to advance the funds in the form of bridge loans that buyers would use for down payments. Buyers would repay the loans after they receive their tax refunds. The FHA will release more details on the program soon.

Keep an eye on stock market direction as mortgage pricing will trade just the opposite

The menu today features a bowl of bank stocks coming to market, all in an attempt to take care of their stress test needs, oversold conditions in treasuries due to last week’s plate full of auction paper, and a touch of Fed buying in long dated treasuries to prop up the market.  Converting all of the above to what’s on the screen has the 10 year note up 21/32’s (yield 3.22%), mortgage backs up 10/32’s, and stocks off 108 on the big board.  The week ahead will give us a good look at Retail Sales on Wednesday and inflation numbers (PPI and CPI) on Thursday/Friday.  From our chart work, the rally today has taken the 10 year note through the 8 day moving average (3.24%).  This is the third time since the bear market trend started a couple of weeks ago.  The two previous attempts to rally were rejected.  Maybe the third time is the charm.  We will need to close below 3.24% today and then march towards the next major resistance level at 3.18% to feel better about the trend.  With stocks up nearly 37% from the March lows, some type of new catalyst will be needed to keep their momentum going.  We see this as a good place for consolidation to occur (stocks) and give a lift to MBS and better mortgage pricing.  Keep an eye on stock market direction as mortgage pricing will trade just the opposite.