Austin Mortgage Blog

Posts Tagged ‘traders’

High probability of a worsening Austin mortgage price change

Just a quick note as the market is starting to take a little heat.  Culprits seem to be hedging for 21 billion of 10 year notes on today’s auction block (high noon cst) and stocks, which are riding a 6 day winning streak.  Currently, the Dow is plus 160 as the likes of Alcoa beat estimates and provided very good guidance going forward.  What we see here is some of the risk premium being taken out of the market as Europe has not imploded, stocks seemingly finding their footing as the market was looking for fading guidance (and not getting it), and the “double dip recession” being taken off the table.

Bonds, notes, and mortgage backs are or were at historic lows.  That said, my bias above provides traders with sticker shock as they look at pricing.  Therefore the fade and/or consolidation trade is in vogue.  As we speak, the 10 year note is off 16/32’s.  Mortgage backs are off nearly a quarter.  English translation is a high probability of a worsening Austin mortgage price change.  We see the tactical bias as being defensive with conditions and chart work pointing to a more bearish outcome.  Borrowers are advised to stay with this market and don’t let it put you to sleep.  It could be costly.

USDA UPDATE: In a nut shell, the USDA program is out of money (except for disaster funds in a few areas)

Maybe Shangri-Las were thinking about the fixed income market when they recorded their hit single, “Leader of the Pack” in 1964.  Something like

“ I met them at the Treasury store, they told me that they were bad, but I knew they were really glad, that’s why I fell for the Leader of the Pack”.

Treasuries are the big dog on the global market with traders from all corners of world running to them for safety.  Take for example the Treasury International Capital Flows (TIC Index) which measures the purchases of our Treasuries by foreign entities.  In March alone, 108.4 billion were bought, making it the instrument of choice as global debt issues and stock market roller coasters rule the day.  PPI, a measure of inflation at the wholesale level, hit the tape with a benign reading of minus .1% headline and a core print (ex-food and energy) of plus .2%.  Nothing to be scared of here and if anything, a deflationary trend may be setting up due to the global slowdown in Europe.

April Housing Starts also hit the tape, up 5.8% to 672K units.  Not bad except when you look at new Building Permits which dropped 11%.  Still tough sledding for the builders out there.  10 year trading has been volatile this morning as we opened in the red (down 12/32’s) with mortgage backs off 5/32’s.  Stocks have worked their way off the early morning highs ( opened up 80 now up 47), helping treasuries and mortgage backs to boot strap themselves back to unchanged.

USDA UPDATE: In a nut shell, the USDA program is out of money (except for disaster funds in a few areas).  The Senate now has three competing bills so the work out process has begun.  Nothing scheduled on the Senate floor so this could take some time.  USDA issued guidance stating that they would issue condition commitments so we could proceed with the loan process but not close until the program was funded.  USDA has now pulled that guidance to issue conditional commitments.  As you can see, this is a mess.  Investors such as Chase, etc. will not take locks unless you have a conditional commitment or are in a county that has adequate disaster funds available as they see this as hedging a “phantom” pipeline.

Have questions about USDA funds? Call me (512) 293-1239.

With current levels at 3.77%, the market needs to boot strap itself back together or further downside (worsening mortgage pricing) will occur

While yesterday was a ho hum, mainly flat day, Wednesday’s trade has been anything but.  It all started across the pond as Germany’s Business Climate Index jumped a few points and Euro zone PMI Indexes (services, manufacturing, and composite) all came in on the plus side.  On the flip side, Fitch downgraded Portugal as another one of the PIG countries struggles with its debt.

Durable Goods greeted stateside traders at plus .5% while the ex-transportation component was plus .9%.  Both were a touch below consensus.  Weakness in Durables can be traced to New Home Sales which fell 2.2%, setting a new record low (308K units annually).  All of the above has pushed the 10 year note towards the bottom of the range, down 22/32’s to yield 3.77%.  Mortgage backs have fared better with spreads tightening (Fed taking 1.25 billion out of the market) but are still off a smooth 11/32’s.  Stocks complete the sea of red hat trick, off 20 points on the big board.

While the economic data is seen a net neutral, the technical set up on the chart looks more like a pit bull.  Reason being is that the selling today has sliced through the trend line that has restricted the downside (acted as support) since December 2009.  Couple that with bearish oscillators kicking in and a breach of the 40 day moving average and you have the makings of the “perfect storm”.

Today’s day-end close will be very important.  We need to hold 116 22/64^th on the futures chart (yield equivalent is 3.75%) to feel better about the range trade continuing.  With current levels at 3.77%, the market needs to boot strap itself back together or further downside (worsening mortgage pricing) will occur.  42 billion in 5 year notes (today’s auction) could be the key.  Yesterday’s 2 year auction was a dog, giving traders suspicious minds about the outcome of today’s 5’s and tomorrow’s 7’s.  Good participation will go a long way to helping our cause.  Given the way we ticked off the Chinese lately, that is not a given.  Keep both hands on the wheel.  We’ll update you on the auction results (12:00 cst).

Using one standard deviation and a dart board, our bias is for 100k in job losses and a 9.9% unemployment rate

Let’s see what we have to deal with today; Sovereign debt problems in Greece continue to hold Euro zone hostage, massive short in our mortgage backed securities paper has traders scrambling, economic news such as Productivity, Factory Orders, Unemployment Claims, and Pending Home Sales, Treasury auction supply coming next week, and tomorrow’s weather skewed Employment Report due out at 7:30 am cst.  Just another day at the salt mine.

Weekly Unemployment Claims fell 27K to 469K as seasonal factors and the weather related snafu has everyone guessing is this real or Memorex.  The big picture points to the percentage of eligible people receiving unemployment benefits being 3.5%, well above the reading that creates jobs.  Seems to us that unemployment is stabilizing albeit at higher levels.  Not the makings of a vibrant economy.

Pending Home Sales looked like a Rottweiler as well, falling 7.6% in January.  Economists were looking for a plus 1.0% print.  Once again, the NAR Chief Lawrence Yun blames the weather for affecting home shopping.  Maybe we’ll get a clear read in July.  For the record, all regions were in the red with the West falling 13.2%.  Did it snow in California?

Factory Orders were up 1.7% with the ex-transportation up .1%.  A 15% gain in transportation orders did this trick for this number.  Maybe new accelerator parts for Toyota.  Productivity gains were off the chart, rising 6.9%.  The flip side was a drop in labor costs of 5.9%.  We are putting computers to work, not Joe the Plumber.  All of the above has flattened the yield curve with the 10 year note up 4/32’s and the bond plus 13/32’s.

One positive here is that until we work through this massive off sides market position in MBS, mortgage pricing will be supported, helping to keep pricing stable.  I’m going to give you our best guess on tomorrow’s jobs data.

Expectations for the February Employment Report are as follows;

1)      Non-Farm Payrolls – Minus 50K

2)      Unemployment – Rate 9.8%

3)      Hourly Earning – Plus .2 month on month

4)      Average Work Week – Minus .2

As we have been talking about, the weather is going to make a mess of the numbers.  We expect continued job losses in manufacturing, construction, and private services payrolls.  Construction should be hit the hardest, probably losing another 50K.  Consensus workers are a wild card as the government is expected to ramp up hiring, adding 1.2 million short term workers over time.

Using one standard deviation and a dart board, our bias is for 100k in job losses and a 9.9% unemployment rate.  JPMorgan has the call at minus 90K and 9.9%, Barclays at Minus 75K and 9.8%, Wells Fargo at minus 80k and 9.7%, and Credit Suisse the outlier at minus 125K and 9.9%.  If there is a miss, it will be towards more job losses than less.  You may recall that I wrote about John Ryding call that job losses would be minus 250K.  Don’t know if he is right but I do know he’s a pretty sharp dude.  What will the market do?  Most likely blow the numbers off due to distortions in the weather but trade nonetheless in a volatile fashion.  Once the dust settles, we would expect that pricing will be close to today’s levels “unless” the number is below expectations.

Let’s say we see a -25K or unchanged print.  We feel the market would interpret that to be much better than expected once you factor in the weather distortion.  Really, this one is a crap shoot.  Technically, we’re not getting much help as the 10 year note chart has formed a triangle pattern on the daily time frame.  We would need to close below 3.45% to turn this into a raging  bull (currently 3.61%) so not much help there.  Triangle patterns typically wind themselves up, tighter and tighter before a break out occurs.  Given the distance in basis points for a bullish outcome, we would side with a break out to higher yields/ worsening mortgage pricing to coincide with the ending of the short squeeze in the MBS market.  To put this in English and cut to the chase, be careful out in the days ahead.

The market was doing just fine until the headlines broke the minutes of last month’s FOMC meeting (Fed Open Market Committee)

The market was doing just fine until the headlines broke the minutes of last month’s FOMC meeting (Fed Open Market Committee).  The “Street” didn’t take kindly to comments regarding treasury asset sales, consideration of a .25 bps hike in the Discount Rate, and a general hawkish tone once they can determine that a recovery is “self sustaining”.  The “headlines” unnerved traders, causing the 10 year note to drop ½ point in minutes.  Although the 10 year and mortgage backs are set to close on the weak side, major support held.  We are closing below the 21 day moving average for the first time since January 12^th, a not so good sign.  We need to be careful here as any close above 3.79% on the 10 year note will set a bearish trend in motion (currently 3.74%).  For now, we are just testing the bottom of the range with sellers holding an edge.  Best to stay defensive into tomorrow morning’s Weekly Claims release and PPI (inflation at the wholesale level).

Related articles

• FOMC Minutes: Market Watchers React (blogs.wsj.com)

The week ahead will be loaded with first tier data including everything from Construction Spending, Housing numbers, and the Employment Report for January

The lack of month end buying and rebounding stocks has pinched treasury and mortgage pricing this morning.  10 year notes are off 12/32’s (yield 3.65%), mortgage backs off 6/32’s, and stocks are up 85 on the big board.  The week ahead will be loaded with first tier data including everything from Construction Spending, Housing numbers, and the Employment Report for January.

Earlier today, Personal Income/Spending hit the tape plus .4% and plus .2%, slightly better than economists had predicted yet not anything to write home about.  Construction Spending was another story, falling 1.2% versus the minus .5% many were looking for.  Cold weather and competition from a heavy inventory of distressed/foreclosure sales has done the trick once again.

The ISM Index (Manufacturing) surprised to the upside, putting it its best number since August 2004 (plus 3.5 points to 58.4).  Digging deeper into the numbers, most of the gains came from new orders as inventories need to be rebuilt.  The question now becomes, will buyers step up to take the newly produced goods off the shelf?  Time will tell.

President Obama’s projected budget sets a new record deficit (1.516 trillion in 2010) as the new budget looks to be 3.8 trillion.  Bailout costs for FNMA and FHLMC alone will be 153 billion.  Wow.

Technically, note, bond, and MBS structure are in neutral as follow through to the upside (rally) is not in the cards.  Bulls need the 8 day moving average (currently we’re sitting on it) at 3.65% to hold.  We expect that area to hang in there into tomorrow.  Traders will then make a move, one way or the other, on Wednesday and Thursday to hedge positions up for Friday’s Employment Report.  Tough one to handicap as predictions on Nonfarm Payrolls and the Unemployment Rate are all over the map.  Cautiously optimistic is the best we can come up with.

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.

Just a quick update as we are minutes away from the results of today’s 40 billion 10 year note auction

Just a quick update as we are minutes away from the results of today’s 40 billion 10 year note auction.  The market has slipped a touch, primarily due to hedging in front of the issue.  10 year note down 8/32’s (yield 3.75%), MBS off 5/32’s, and stocks up 33 points on the Dow.  The $10,000.00 question is who will or will not show up to buy the auction.  Deficits, taxes, unemployment, etc. etc. combine to make traders nervous.  Bid to cover and Indirect buyer percentage will be the key.  Expect a sharp pickup in volatility once the results hit the tape.  Both hands on the wheel as we approach the high noon cst data.

The market has been under a little pressure all day, primarily due to hedging for today’s 10 year note auction (21 billion)

The market has been under a little pressure all day, primarily due to hedging for today’s 10 year note auction (21 billion).  The market seems to be set up for consolidation, but one that will take the yield only a few bps higher.  Traders will most likely buy the dip and then repeat the process tomorrow for the 30 year auction (13 billion).  Given the fear that’s rumbling through Dubai and Greece, and now spreading to down grade warnings for the UK and Spain, it’s a stretch to see the treasuries trading any higher than 3.50% on the note.  We see traders buying the dip due to all of the above and the tendency to sit on their hands into year end.  The news today was light (see below) with what little we had being second tier data.  Overall, the market remains defensive and choppy yet still holding neutral trending indicators.  Currently, the 10 year note is off 5/32’s (yield 3.41%), mortgage backs off 6/32’s (we priced down 4/32’s), and stocks up 7 points on the Dow.  Keep and eye on the market as the auction results are released (high noon cst).  Barring any surprise, we’re looking for a little rebound (improvement) in yields.

Somewhat of a “let’s see what the other guy does first” type of attitude

Meant to post yesterday.

25 billion in 10 year notes will be the focus for today as the auction deadline is less than one hour away.  No news but plenty of Fed Governors are speaking with traders looking for any clues as to what they have up their sleeve.  Lockhart, Yellen, Rosengren, Tarullo, and our very our Dallas Fed governor Fisher are all on the scrambled egg/rubber chicken circuit.  For the most part, the day has been quiet with stocks hanging around unchanged and the 10 year note up 6/32’s (yield 3.46%).  As far as the auction is concerned, street talk has it that dealers are expecting a “fair” retail showing but not one that will blow the doors off.  Somewhat of a “let’s see what the other guy does first” type of attitude.

The technical trades supports a cautious approach as the 10 year chart has traded back to the October highs and then backed off.  The daily chart has formed a “reverse head and shoulders” pattern with today’s trade touching the neck line (October high).  From a traders perspective, this is a good place to sell, given the resistance is clear and will be difficult to take out.  The flip side would be if we can trade below 3.42%, especially on a closing basis.  That would blow through that neckline and project a run to the old highs set last September (yield of 3.12%).  If this happens, gains on the 10 year would be about 1 ½ points and improve mortgage pricing.

Today’s auction will go a long way in determining our next direction.