Austin Mortgage Blog

Archive for January, 2010

China slowing its economy, Greece going broke, and political policy uneasiness in Washington DC are all giving the stock market a continuing headache

Although the early morning economic data was much better than expected, especially GDP plus 5.7%, stocks are just above unchanged and bonds, notes, and mortgage backs are grinding higher (rally).  Most of the improvement in treasury and mortgage pricing can be attributed to month end hedge fund extensions.  Barclays index, which most money funds must follow, call for a .06 duration extension in fixed income funds.  This is healthy and has forced firms that must comply to the index to step up and buy all the instruments we just talked about.

Concerns over stock price valuations continues to support our market as well.  China slowing its economy, Greece going broke, and political policy uneasiness in Washington DC are all giving the stock market a  continuing headache.  Monday will be a new month and the hedge fund buying will be history.  More this afternoon as we wrap it up for the week.

Fed To End MBS Purchase Program

There was major economic news on many fronts this week, with mixed results for mortgage markets. The Fed statement essentially followed the expected script, demand was strong for the Treasury auctions, and much of the economic data released during the week was stronger than expected. The net effect was a small increase in mortgage rates during the week.

As expected, the Fed made no change in the fed funds rate on Wednesday. The biggest surprise was that the Fed’s Hoenig dissented from the decision, as he believes that economic conditions have improved enough that the Fed should begin to tighten policy. The Fed’s outlook for the economy was slightly more positive than in the prior statement. The statement repeated that the mortgage-backed security (MBS) purchase program will be concluded by the end of March. Some investors were disappointed that the Fed didn’t show more support for a possible expansion of the MBS purchase program, and mortgage rates rose after the news.

There is a wide range of expectations in the investment community about the impact of the end of the MBS purchase program on mortgage rates. The Fed has been purchasing roughly 75% of new MBS issuance, and a decline in demand from one source normally leads to higher yields to attract other buyers. One argument, however, is that the end of the program has been expected for quite a while, so mortgage rates already reflect the news, and there could be little reaction over coming months. Other analysts predict an increase in mortgage rates of as much as one percent. The Fed itself expects a small increase in mortgage rates as a result of the end of the program.

The best the market can hope for (short term) is to stabilize at current levels given all the uncertainty in stocks and global assets

32 billion of 7 year notes just hit the auction block.  The yield came in at 3.127% with 51.1% going to the Indirect Bidders (great number).  Bid to cover was 2.85 to 1 (average is 2.71 to 1) which is a plus as well.  The only negative (not huge) was that the issue produced a .05 bp tail.

A few of you have asked, “what do you mean by a tail.”  At the final bell of the auction (12:00 cst), the screen will reflect the final yield or offered yield for that auction.  Bidders put in an orders which can range from a certain price to “when issued”, meaning they will take the final yield at the bell.  If all of the bids are at the final yield or below, everyone’s order gets filled at that price/yield.  We call that a “bullet” auction.  When that is not the case, the issuer (Treasury) will go to the next highest yield and award orders until the entire issue is sold.

So, today’s auction went to the masses at 3.127% with a small percentage being awarded at 3.177%, producing a .05 bps “tail”.  Hope this makes sense.  Overall, we’ll give this auction a B plus.  Speaking of B’s, the stock market has one in its bonnet, down over 100 points on the big board.  Reasons for the selling stem from worse than expected Durable Goods Orders (plus .3%) and Weekly Unemployment Claims (down 8K expected to be down 20K).

Greece is still in the news as its sovereign debt takes a pounding.  It didn’t help when ECB President Trichet said that each country must take care of itself and not expect the EU to bail them out.  So, so earnings are in part to blame as top line revenue growth is ok at best, leading to the conclusion that stocks may be in for a 10% to 20% correction.  Sure looks like it to me.

Currently, the 10 year note is off 7/32’s (yield 3.67%), mortgage backed securities off 3/32’s, and stocks off over 100 points.  As we mentioned yesterday, the chart points to a top in the making, evidenced by its failure to hold below the 3.65% yield mark.  We see the market in a consolidation phase, one that could push yields closer to 3.72%.  The best the market can hope for (short term) is to stabilize at current levels given all the uncertainty in stocks and global assets.  Good idea to stay defensive and see how the next day and a half play out.

Home Buying Stars Are Aligned

The saying “the stars are aligned” pretty much sums up the housing market today. Let’s take a look at why buying today — not waiting until Spring, for example — makes sense.

The Department of Housing and Urban Development (HUD) recently made changes to the cost of getting a loan guaranteed by the Federal Housing Authority (FHA). On April 5th, 2010, the cost of required up-front mortgage insurance on FHA insured loans will be increased by one-half per cent. This could add $1,000 or more to the loan amount. Although it is usually financed in the loan, the extra cost will be paid by the homebuyer one way or the other.

There are also changes coming to the amount a home seller can contribute toward the buyer’s costs at closing. Currently, FHA allows the seller to contribute up to 6% of the home’s price. That will be cut in half to just 3%, probably sometime this Summer (the date has not yet been set by HUD). This could mean many thousands of dollars more that the homebuyer will have to come up with at closing.

Mortgage rates are near historic lows, BUT the Federal Reserve Board’s mortgage backed securities purchase program is set to expire. The Fed has already scaled back its purchases over the last few months, allowing rates to rise on mortgages. Once the Fed stops the purchases entirely at the end of the first quarter, rates are expected to rise a half per cent or more.

The deadline for the Home Buyer Tax Credit is for contracts written on or before April 30th (and set to close no later than June 30th).

All of this adds up to a big “don’t wait!” If you or anyone you know is thinking about buying a home, please have them call or email us today.

With 15 minutes to go in cash Treasury/MBS trading, the market is going out on the lows (highest yields/worst mortgage pricing) of the day

With 15 minutes to go in cash Treasury/MBS trading, the market is going out on the lows (highest yields/worst mortgage pricing) of the day.  Fed Governor Hoenig’s dissent looks to us like an interest rate protest or maybe it’s the first vote/trial balloon.

Traders were expecting the same old, same old and got sideswiped by the hawkish detail I just mentioned.  This one is a tough call, trying to figure out if it’s the beginning of a tightening cycle or the Fed’s way of testing the market towards removal of accommodation (stopping the Treasury/MBS purchase program, etc.)  With so many cross currents it’s tough to remember who’s on first.

I can tell you from a technical stand point that the market put in an outside day down, including a test of the best levels we’ve seen since November and then failing.  The rejection from the top and outside day down are strong indicators of a market top in the making.  This does not mean that the consolidation we expect will be huge, just that it has a very high probability.  Given the fact that the 8 day moving average held, sellers will need to trade the market above 3.65% for a sustained period of time to do any real damage.

For now, the brackets to watch are 3.65% to 3.57% (we are set to close right at 3.65%).  Anything outside these parameters to the high side is bearish for interest rates and below 3.57% is bullish.  Given the uncertainties on so many fronts, you should expect the unexpected right along with volatile trading and mortgage pricing.  Hopefully, the State of the Union Speech will give us a little help.

FOMC Press Release January 27, 2010

Release Date: January 27, 2010

For immediate release

Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating. Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls. Firms have brought inventory stocks into better alignment with sales. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack continuing to restrain cost pressures and with longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter. The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

In light of improved functioning of financial markets, the Federal Reserve will be closing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility on February 1, as previously announced. In addition, the temporary liquidity swap arrangements between the Federal Reserve and other central banks will expire on February 1. The Federal Reserve is in the process of winding down its Term Auction Facility: $50 billion in 28-day credit will be offered on February 8 and $25 billion in 28-day credit wil be offered at the final auction on March 8. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30 for loans backed by new-issue commercial mortgage-backed securities and March 31 for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.

Markets are slipping as we speak, warranting a worsening reprice

Just a heads up as the market is drifting lower (MBS now down 5/32^’s) as Fed Governor Hoenig, who believes that economic and financial conditions have changed sufficiently and that expectations of low interest rates for an extended period of time are no longer warranted.  Comments were made about Treasury/MBS purchase program that are set to expire March 31^st or June 30^th are still in vogue.  Markets are slipping as we speak, warranting a worsening reprice.  Hang in there.

Treasury Secretary Geithner is medium rare as the House Oversight Committee is grilling him on AIG

Treasury Secretary Geithner is medium rare as the House Oversight Committee is grilling him on AIG.  Undisclosed documents, backroom deals, maybe a cover up coordinated with Sir Bernanke, and the counter parties all paid off at par (by the taxpayers) are the hot topics.  As we speak, their search for a smoking gun continues.

The FOMC is finishing up their two day meeting with any change in short term rates and policy statement due out at 1:15 pm cst.  The consensus thinking is that they will continue their low interest rate policy for an “extended period of time”.  We also expect the FOMC to note that the economy still has “challenges” with some improvement seen within the economy.

Given today’s power packed agenda, the FOMC should not move the market.  Earlier this morning, New Home Sales dipped by 7.6% to 342K units.  Sales gains in the Northwest and West were over shadowed by losses in the Midwest and South.  Housing, along with employment, needs to be top priority for our country.  Let’s see what the CEO of the U.S. has to say tonight.

We also have 42 billion of 5 year notes on the auction block.  Results are due at high noon cst.  Given the anxiety in stocks and overseas markets, we expect the issue to go well.  Trouble with this call is that it is happening on a FOMC day and historically, only one out of the last five have come in on the screws.  The others had been sloppy.  Technically, the market is making higher highs and higher lows, holding the bullish regression line.

Once again we challenged the 3.56% yield level and have backed away.  Currently, the 10 year note is up 6/32’s (yield 3.61%), mortgage backs up 3/32’s, and stocks off 30 something on the big board.  Buckle up!

Daily oscillators are still posting positive readings and holding above midrange levels – all good things for those that want lower mortgages/better pricing

Results of the first leg of this week’s auctions (2 year note) just hit the tape.  Yield came in at .88%, Indirect Bidders took only 11%, and the bid to cover was 3.13 to 1.  The issue also had a 1 bp tail.  This was not an aggressive auction so we’ll give it a C.  Post results, the market pulled back and briefly when negative on mortgage backed securities.

Currently, the 10 year note is up 2/32’s (yield 3.62%), mortgage backs up 1/32^nd, and stocks plus 73 on the big board.  Trading is a little spooky right now as Wall Street dealers fear there might not be the sponsorship for Wednesday and Thursday’s longer duration auction paper ( 5’s and 7 year notes).  We also have the FOMC statement tomorrow and the State of the Union speech so buckle up, this thing could get slippery.  Earlier today, Consumer Confidence was out with a print of 55.9 (improvement) and the Case Shiller Home Price Index was down 5.3% (as expected).

Earlier than that, the wheels were churning across the pond as Italy, Greece, Spain, Portugal, and now Japan are struggling with their sovereign debt.  S&P just put Japan on the negative credit watch.  With China putting the brakes on bank lending, the mood outside the U.S. is tentative at best.  On the bright side, Barclay’s has issued their indices for month end extensions, a measure that fixed income funds must conform to per their filings.  The extensions are larger than expected so in English, this will be supportive of mortgage pricing until at least Thursday afternoon.  Technically, the high today approached the 62% retracement level of the November/December selloff (188 11 in futures/ 3.56% yield on the 10 year note).  We failed to take that level out and have now backed away.

Not to rain on your parade but this failure could be the start of a new corrective phase.  Your key will be if yields on the 10 year note print 3.65% or higher.  On the bright side, daily oscillators are still posting positive readings and holding above midrange levels.  All good things for those that want lower mortgages/better pricing.  Just want you to know that this baby is like herding cats so keep both hands on the leash!

Existing Home Sales hit the tape down 16.7% to 5.45 million units, the largest decline since 1968

Stocks are doing a little better this morning (up 57 points on the Dow) on what many are calling the “Bernanke Bounce”.  Seems as though he has enough votes to be reconfirmed for a second term, settling jitters across both equity and fixed income markets.  While this is a plus, the political climate resembled “charged chaos” which has put much more emotion into traders decisions.

Existing Home Sales hit the tape down 16.7% to 5.45 million units, the largest decline since 1968.  Economists were looking for a much better number.  While sales declined in every region, inventories came down a bit, a good sign that “maybe” we can work through glut even if government support dwindles.  We believe that the need to continue both the 8K program as well as the MBS purchase program is needed and will be extended until year end.

The week ahead will have a lot to chew on starting with 118 billion in auction paper (2’s, 5’s, and 7 year notes), the FOMC meeting (Tuesday and Wednesday), the State of the Union speech on Wednesday evening, and a number of economic data points to boot (see attached).  Technically, the bias is to stay defensive until later in the week as we work through the auctions, Fed, and the President’s message.  Chances are good his speech will focus on jobs, jobs, and more jobs.

Currently, the market is slipping a bit as current coupon MBS are off 6/32’s and the 10 year note trades a 3.63% yield.  Be careful out there.