Monday, December 21, 2009

With nothing in the way of new macro-economic data to guide them the few mortgage investors still at their desks appear to be taking their directional cues for mortgage interest rates from trading action in the stock market. In today's early going a solid rally in the stock market is exerting noticeable upward pressure on mortgage interest rats.

Evidently an increasing number of mortgage investors have begun factoring in the likelihood the economy is beginning to pick itself up off of the mat after being brought to its knees by the most severe recession since the Great Depression. Against this backdrop tomorrow's GDP report will likely invoke little, if any reaction from traders. The Existing and New Home Sales figures due on Tuesday and Wednesday respectively are also unlikely to trigger a Grinch like response from market participants.

The November personal income and spending report will be the "biggie of the week" with respect to economic news. Should Wednesday's core personal consumption expenditure index (a component of the November personal income and spending report) post a benevolent reading of +0.1% (as expected) - look for mortgage investors to do nothing more than make one more raid on the holiday goodies in the break-room -- before grabbing their coats and heading home to celebrate Christmas. The few traders that stay around until the final bell sounds at 2:00 p.m. ET will likely cover their few remaining open positions before the holiday break - which may just bring in enough buy orders to nudge mortgage prices a little higher. In my opinion, the chances remain pretty strong that last Friday's profit-taking sell-off in the mortgage market will continue for the first day or two of the week -- before showing a little potential rally on Wednesday and perhaps the half-day session of Thursday.

Friday, December 18, 2009

With nothing in the way of new macro-economic data to guide them, mortgage investors much decide whether to lock in some profits before the trading day comes to an end - or stick with the rally in hopes that it produces more upside gains before the early close for the Christmas Holiday next Thursday.

Look for trading action to become increasingly spasmodic as traders focus on making sure profits are safely registered "on-the-books" and as they put the final touches on their year-end positions. The likelihood that anyone will be aggressively adding large risk positions to their portfolio is small - limiting the potential for a notable move to yet lower mortgage interest rates before the New Year begins.

The few mortgage investors still at their desks next Tuesday will get a look at the final estimate of economic growth for the third-quarter. The majority of economists expect Q3 Gross Domestic Product will register a reading of 2.8% -- exactly matching the previous guesstimate. Tuesday also brings expectations for an improved pace of November existing home sales. The day starts off on Wednesday with the November Personal Income and Spending report. Contained within this data series is the Personal Consumption Expenditure Index, one of the Fed's favorite measure of inflation pressure at the consumer level. While both income and spending are expected to have edged a bit higher last month -- the pace of consumer inflation is expected to have posted a very modest, and mortgage market neutral gain of 0.1%. Wednesday's 10:00 a.m. release of the November New Home Sales and Thursday's initial weekly jobless claims and November durable goods orders numbers will likely draw as much investor attention/interest as a single snowflake in a blizzard. The mortgage market will close early at 2:00 p.m. ET on Thursday and will remain closed on Friday for the celebration of Christmas.

Thursday, December 17, 2009

The number of workers filing new applications for jobless benefits unexpectedly climbed by 7,000 during the week ended December 12th. It was the second straight week initial claims have posted a gain. Most mortgage investors were quick to dismiss this mornings' jump in the jobless claims data since the figures are notoriously volatile during the holiday season because of difficult seasonal adjustments.

Wednesday, December 16, 2009

The Federal Reserve is expected to stick to its mortgage market friendly monetary policy strategy when it wraps up its two-day meeting this afternoon at 2:15 p.m. ET.


Most analysts believe policymakers will be very hesitant to pull the plug on low interest rates too quickly due to persistent weakness in the labor sector, tight lending conditions at both the business and consumer levels, and a non-threatening inflation environment.


This morning's earlier news from the Labor Department indicating consumer prices rose a modest 0.4% in November while the more important core rate (a value that excludes the more volatile food and energy components) remained unchanged from month earlier levels - made the Fed's interest rate decision just a little bit easier. This morning's benign inflation reading at the consumer level went a long way toward tamping down budding inflation fears spurred by yesterday's stronger-than-expected uptick in November Producer Price index data series. For those still wringing their hands about inflation threats it is worth noting that the Fed's long-term forecast for their preferred measure of inflation, the Commerce Department index tied to consumer spending and excluding food and fuel, calls for gains in a range of 1.8% to 2.0%. That gauge, which is typically lower than the Consumer Price Index, was a mere 1.4% in the 12 months to October.


The "so what" factor here is significant. Amid tame inflation and elevated unemployment, the probabilities are extremely high the members of the Federal Open Market Committee will reaffirm their commitment to extremely low interest rates for an extended period. The committee will likely note the recent improvement in household spending and industrial production, but it will not likely use November's unexpected improvement in nonfarm payrolls to revise its overall economic and inflation outlook for its monetary stance. If this assessment proves accurate, the traditional post-meeting statement from the Fed (expected at 2:15 p.m. ET) will likely be mortgage interest rate neutral.


Any hint that the central bank is considering backing off of its asset purchase programs, or perhaps mulling an increase in its benchmark short-term interest rates will likely send mortgage interest rates notably higher. While it is worth noting this risk exists - the probability of such an outcome is exceptionally low.


In other news of the day, the Mortgage Bankers of America said mortgage applications nudged 0.3% higher during the week ended December 11th. Purchase applications fell 0.1% while refinance requests climbed 0.9%. The refinance share of mortgage activity increased to 75.2% of total applications from 74.4% last week. The MBA said borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.9% up 0.4% from the previous week. The rate remained above the all-time low of 4.61% set in the week ended March 27 - but well below well below the year-ago level of 5.18%.

The mortgage market took-one-on-the-chin this morning when the Labor Department reported prices paid at the farm and factory gate jumped more than double the 0.8% gain most analysts had been expecting.


The headline November producer price index was up a surprising 1.8% while the core index (a value stripped of the more volatile food and energy components) posted a larger-than-expected 0.5% gain. The lion's share of the surge in the November producer price index figures was created by a strong uptick in energy costs and new model year price increase for light trucks. Crude oil prices hit $82 a barrel during the survey period for this data but has since retreated sharply - trading around $70 a barrel. Near record excess manufacturing capacity and a jobless rate that is projected to average 10% for much of 2010 will likely prevent suppliers from passing on these increasing costs through at least the end of the first-quarter of the New Year.



Mortgage investors are taking a cautious "wait-and-see" approach in front of the last Federal Open Market Committee meeting of 2009. The text and tone of the Committee's post-meeting statement (scheduled for release at 2:15 p.m. ET, Wednesday, December 16th) will contribute significantly to the trend trajectory of mortgage interest rates up and through the Christmas break.



Any hint that the central bank is considering backing off of its asset purchase programs, or perhaps mulling an increase in its benchmark short-term interest rates will likely send mortgage interest rates notably higher. While it is worth noting this risk exists - the probability of such an outcome is exceptionally low.



Even considering today's outsized gains in the November producer price index numbers -- the underlying pace of inflation remains by all measures comfortably within the Fed's stated "comfort zone." From a historical perspective it is worth noting there has never been a time that the Fed has begun to tighten short-term interest rates as unemployment rates were rising and inflation pressures remained benign.


As things now stand, the central bank will probably guardedly acknowledge the recent improvement in the nation's economic backdrop -- but will clearly renew its commitment to keep its benchmark short-term interest rates near zero for an "extended period." If this assessment proves accurate, look for this event to have little, if any significant influence on the trend trajectory of mortgage interest rates.

Monday, December 14, 2009

Boring.

Trading activity has almost ground to a standstill in the mortgage market as investors choose to take a cautious "wait-and-see" approach in front of the last Federal Open Market Committee meeting of 2009. The text and tone of the Committee's post-meeting statement (scheduled for release at 2:15 p.m. ET, Wednesday, December 16^th) will contribute significantly to the trend trajectory of mortgage interest rates up and through the Christmas break.

Any hint that the central bank is considering backing off of its asset purchase programs, or perhaps mulling an increase in its benchmark short-term interest rates will likely send mortgage interest rates notably higher. While it is worth noting this risk exists - the probability of such an outcome is exceptionally low.

The underlying pace of inflation remains by all measures comfortably within the Fed's stated "comfort zone." From a historical perspective there has never been a time that the Fed has begun to tighten short-term interest rates when unemployment rates were rising and inflation pressures remained benign. As things now stand, the central bank will probably guardedly acknowledge the recent improvement in the nation's economic backdrop -- but will clearly renew its commitment to keep its benchmark short-term interest rates near zero for an "extended period." If this assessment proves accurate, look for this event to have little, if any significant influence on the trend trajectory of mortgage interest rates.

Friday, December 11, 2009

It appears many mortgage investors are fretting far more strenuously over the disappointing auctions of 10-year and 30-year debt obligations than they are over a stronger-than-expected reading for November Retail Sales.

There are some analysts aggressively trying to fan worries that the last two Treasury auctions of the week drew less than stellar demand because -- U.S. government debt obligations - seen as the world's safest securities - are in danger of losing their coveted AAA rating. While such an event is certainly possible - it is not very probable and there is a major difference between those two conditions. It is much more likely that weaker-than-expected demand for Wednesday's $21 billion of 10-year notes and Thursday's $13 billion of 30-year bonds is more a function of year-end investor preference for either cash or very short-term government debt obligations. It is far more likely we are dealing with a seasonal condition with respect to demand for these longer-dated securities - rather than the effects of a major shift in investor sentiment.

Selling pressure in the mortgage market surged this morning driven by a report from the Commerce Department indicating November Retail Sales increased 1.3%, its largest advance since August, after rising 1.1% in October. It was the second straight monthly gain for overall retail sales and handily beat market expectations for a 0.7% gain. Compared to last year, overall retail sales were up 1.9%, the first year-on-year gain since August 2008. Excluding autos, retails sales increased 1.2% last month, the largest increase since January.

As the day progresses look for calmer, cooler heads to conclude that a significant amount of the surge in the pace of November sales was created through heavy discounting by retailers attempting to get a head-start on the holiday season. There is still a big question mark attached to the retail sales data regarding the sustainability of November's solid performance. Fundamentally, conditions remain poor for consumers. Wage income is more than 3.0% below its year-ago level and there is little chance of improvement in that figure until the labor sector once again begins to produce more jobs than it looses on a month-over-month basis. In a nutshell - in the judgment of many of the so called "experts", it is unlikely this report is as threatening to the prospects of steady to perhaps fractionally lower mortgage interest rates as many "talking-heads" are currently trying to make it out to be.

Stay Tuned...

Tuesday, December 8, 2009

Global stock markets fell hard earlier today as pessimistic news reports trumpeting details of a resurgent credit crisis in Dubai and a major downgrade in the sovereign debt of Greece sent foreign stock investors scrambling to park capital in the relative safe haven of U.S. debt obligations and mortgage-backed securities. This "flight-to-quality" buying spree in the government debt and mortgage market is a welcome but likely temporary development.

Uncle Sam will be in the credit markets today looking to sell a stack of 3-year notes worth $40 billion. The auction will conclude at 1:00 p.m. ET and is expected to be well bid - hopefully setting the stage for an equally well bid $21 billion 10-year note sale tomorrow and a $13 billion 30-year bond offering on Thursday. Look for today's auction to exert little, if any meaningful influence on the trend trajectory of mortgage interest rates.

Monday, December 7, 2009

With nothing on the economic calendar to stir trading activity - mortgage investors are generally marking time ahead of the three-part, $71 billion Treasury debt auction scheduled for Tuesday through Thursday. Believe-it-or-not last week's heavy sell-off in the government debt market has probably limited the upward pressure this event might have otherwise exerted on mortgage interest rates over the course of the next five business days.

Mortgage investors will be intently watching the Treasury auction results for any sign that a change in market psychology occurred in conjunction with last Friday's dramatically improved labor market story - or for an indication skepticism about the sustainability of the budding economic recovery remains high among credit market participants.

Given strong seasonal demand and the sharp price markdowns of last week, I think there is a reasonable chance overall demand for this week's government debt offerings will be decent. Should my assessment prove accurate, the Treasury auctions will tend to be supportive of at least steady mortgage interest rates - with an outside chance rates will find the traction necessary to move to fractionally lower levels.

The economic release of most interest to mortgage investors - the November Retail Sales report - does not arrive until Friday.

Friday, December 4 2009

It is almost too good to be true.



Employers cut far fewer jobs than expected last month in the best showing for the labor market since the recession began in December 2007. According to government figures, the economy shed only 11,000 jobs last month - far fewer than the 130,000 drop in the November headline nonfarm payroll figure most economists had anticipated. The national jobless rate dropped to 10% from October's 10.2%.


The data geeks that compile these figures also announced that they had overstated the job losses in September and October by 159,000. Not only did payroll losses drop sharply, but leading indicators of employment also improved significantly. In particular, temporary help agencies added 52,000 jobs last month following a gain of 40,000 in October. Businesses tend to ramp up their temp numbers before adding permanent headcount to their payrolls.



On its face the story from the labor sector is that the worst of the recession appears to be behind us. The recent flow of macro-economic data continues to paint a developing picture of the economy in transition from a deep recession to a modest recovery. That's terrific news for the millions of American's who yearn to return to the labor force -- and overall I think it is good news for single-family mortgage originations.


Even though improving statistics from the labor sector will likely encourage the Fed to be more vocal about an exit strategy from their sharply mortgage market friendly monetary policy strategies - the inevitable rise in mortgage interest rates will probably be largely muted by a return of consumer confidence which subsequently will likely lead to improved demand for homeownership.


Which is worst - an economy in which a loaf of bread costs $1.00 and a man/woman happens to have a $1.00 to spend on bread - or an economy is which a loaf of bread cost 25 cents and a man/woman has no money at all to spend on bread or anything else?



Looking ahead to next week Uncle Sam returns to the credit market looking to borrow $70 billion or so in the form of 3-year notes on Tuesday, 10-year notes on Wednesday and concluding with a 30-year bond offering on Thursday. The only major economic report on tap is Friday's 8:30 a.m. ET release of the November Retail Sales figures.

Thursday, December 3, 2009

Following a stronger-than-expected weekly jobless claims number - mortgage investors were quick to push mortgage interest rates fractionally higher in the day's early going.


According to the Labor Department, new applications for jobless benefits unexpectedly fell by 5,000 last week to the lowest level in more than 14 months. While this jobless claims report falls outside of the survey period for tomorrow's 8:30 a.m. ET release of the far more important November nonfarm payroll figures -- some investors wasted no time placing their "bets" for a surprisingly mortgage market unfriendly employment story.


I personally think these mortgage investors may have jumped the gun a bit. Even though the first-time claims number was better than the majority of economist had anticipated - the number of people continuing to collect benefits after the initial week rose by 28,000. Going one step further, with hiring so slow, the unemployed are exhausting their regular benefits (26 weeks in most states) and instead are claiming extended benefits or Emergency Unemployment Compensation. Growing totals for these programs have more than offset the decline in the regular weekly jobless claims number. For the week ending November 14th, the enrollment in the extended benefits programs offered by the government grew by 323,000. From this perspective, the weekly jobless claims numbers are almost certainly glossing over the underlying anemic conditions in the labor market.



The probabilities remain high that Friday's November nonfarm payroll will fall within shouting distance of the consensus estimate for a national job loss number of 130,000. If so, the Labor Department's data will likely exert little, if any influence on the mortgage market. On the other hand, if the headline number shows the economy lost 150,000 jobs or more and/or the national jobless rate exceeds 10.3% -- the odds are high that a large number of investors will be caught leaning the wrong way - resulting in higher prices and lower mortgage interest rates before the day is over.

Wednesday, December 2, 2009

The swoon in the mortgage market yesterday afternoon was primarily the result of capital flowing out of the relative safety of U.S. government debt obligations and mortgage-backed securities back into higher risk asset classes as market participants became increasingly convinced the Dubai story would not morph into a another major global financial crisis. Easy come - easy go.


Trading action so far today is being driven by a relatively few players moving light volume. There is nothing much going on to inspire more dynamic action between buyers and sellers.



According to a report released earlier this morning by ADP Employer Services, U.S. private employers cut 169,000 jobs from their payrolls in November which was fewer than the 195,000 jobs lost in October but more than the 155,000 jobs loss that most analysts had been anticipating the data would indicate. It was the eighth straight month of fewer job losses reported by ADP. It may not be exactly what market participants were looking for, but at least the trend is right. The ADP report has been weaker than the government's much more important Nonfarm Payroll figurers in nine of the past 11 months, with an average miss of -55,000. The probabilities remain high that Friday's November nonfarm payroll will fall within shouting distance of the consensus estimate for a national job loss number of 130,000. If so, the Labor Department's data will likely exert little if any influence on the mortgage market.



In their standard Wednesday report, for the week ended November 27th the Mortgage Bankers of America said their mortgage application index (a value that includes request for both purchase and refinance loans) was up 2.1% over the previous week. The purchase index was up 4.1% while the refinance index gained 1.7% from the week before. Refinance applications accounted for 72.1% of all applications. It was the first time in eight weeks that both the purchase and refinance indices increase from the previous week.



To sustain the current level of mortgage interest rates will likely require softer-than-expected November employment numbers on Friday and/or a major sell-off in the stock markets. While both outcomes are certainly possible - they are each in their own right not very probable.
In my judgment, Friday's headline nonfarm payroll report will need to show the economy lost more than 150,000 jobs and/or the national jobless rate exceeded 10.3% last month in order to induce mortgage investors to push mortgage interest rates notably lower. In terms of stock market trading activity it will likely take a convincing move below the 10,200 mark for the Dow Jones Industrial Average before a sustained flow of capital out of the stock market could be counted on to support the prospects for notably lower mortgage interest rates.

Tuesday, December 1, 2009

The Dubai saga that agitated financial markets last week is coming to an end. The rest of the world is starting to minimize the Dubai World story now. Dubai is in talks with its lenders to restructure $26 billion of debt, easing concerns that a default would add to the $1.7 trillion financial companies around the world have written down as the credit crisis impaired the value of their assets. The general sense among credit market participants is that fallout from the Dubai situation will be both short-lived and very limited. The resulting flow of capital that poured into the relatively safety of U.S. government debt obligations and mortgage-backed securities late last week as the Dubai story hit the newswires is now flowing back out into riskier asset classes like stocks -- creating some slight upward pressure on mortgage interest rates in today's early going.



The Institute for Supply Management (a not-for-profit United States association established for the benefit of the purchasing and supply management profession, particularly in the areas of education and research) reported their November measure of overall national manufacturing activity decelerated to 53.6% from 55.7% in October. The modest decline in the overall index did not ring any alarm bells among mortgage investors since the index remains consistent with the general view that industrial production growth and growth within the economy in general will be sustained into the foreseeable future. That perspective is already reflected on virtually every mortgage rate sheet in the marketplace.



In other news of the day the National Association of Realtors reported its Pending Home Sales Index (a measure of the number of contracts signed for the sale of existing homes) rose a better than expected 3.7% in October, its ninth consecutive monthly gain. The housing market, one the primary triggers of the worst U.S. recession in 70 years, continues to show signs of recovering from a three-year decline. However, many mortgage investors are discounting the current improvement in the housing market, reasoning that the recovery is artificially supported by tax credits for both first-time and move up borrowers and by mortgage interest rates resting near historical lows due to direct government intervention. This particular report will not likely exert much, if any influence on the direction of mortgage interest rates until/unless it reflects market conditions devoid of the massive but temporary government support programs.



To sustain the current level of mortgage interest rates will likely require softer-than-expected November employment numbers on Friday and/or a major sell-off in the stock markets. While both outcomes are certainly possible - they are each in their own right not very probable.
In my judgment, Friday's headline nonfarm payroll report will need to show the economy lost more than 150,000 jobs and/or the national jobless rate exceeded 10.3% last month in order to induce mortgage investors to push mortgage interest rates notably lower. In terms of stock market trading activity it will likely take a convincing move below the 10,200 mark for the Dow Jones Industrial Average before a sustained flow of capital out of the stock market could be counted on to support the prospects for notably lower mortgage interest rates.

Monday, November 30, 2009

As more details emerge regarding the possible debt default in Dubai -- things do not appear nearly as bad as originally feared.


· The Dubai government has disclaimed responsibility for the debts of Dubai World. A Dubai government official made it clear during a press conference earlier today that while the government has an ownership stake in the company Dubai World, the conglomerate had long operated as a standalone entity and its debt was never guaranteed by the emirate's government. Because of this arrangement, the sovereign debt obligations of Dubai were in no way threatened by the restructuring of the credit obligations of the individual company.


· Global credit market investors were further comforted by an announcement by the United Arab Emirates central bank today that it would provide additional liquidity to local banks as needed -- thus averting any possibility of a major run on the deposits of the many large banks in the region.



· Last but not lest, domestic credit market participants breathed a collective sigh of relief when it was determined over the weekend that major money center banks here in the U.S. have little to no loan exposures to the debt obligations of Dubai World.



As concerns about another Lehman Brothers like meltdown in the global credit markets begin to fade -- so too will the flow of "flight-to-quality" capital into the safe-haven of U.S. government debt obligations and mortgage-backed securities. To sustain the current level of mortgage interest rates will likely require softer-than-expected November employment numbers on Friday and/or a major sell-off in the stock markets. While both outcomes are certainly possible - they are each in their own right not very probable.



In my judgment, Friday's headline nonfarm payroll report will need to show the economy lost more than 150,000 jobs and/or the national jobless rate exceeded 10.3% last month in order to induce mortgage investors to push mortgage interest rates notably lower. In terms of stock market trading activity it will likely take a convincing move below the 10,200 mark for the Dow Jones Industrial Average before a sustained flow of capital out of the stock market could be counted on to support the prospects for notably lower mortgage interest rates.

Wednesday, November 25, 2009

This morning's deluge of macro-economic data initially created a flurry of trading activity in the mortgage market - but the few investors still at their desks quickly lost interest. As I write, trading volume in the mortgage market is exceptionally thin - floating back and forth in a very, very narrow range.

The Labor Department started the parade of economic news this morning - announcing the number of workers filing first-time applications for jobless benefits fell by a very surprising 35,000 during the week ended November 21^st. It was the fourth consecutive week of improvement for this measure of the health of the labor sector. The number of unemployed continuing to draw benefits fell by 190,000. Most market participants shrugged off the Labor Department data as largely distorted by outsized seasonal adjustments.

The Commerce Department chimed in with their report on Personal Income and Spending for October. According to the government, spending by consumers rebounded by 0.7% last month - solidly outdistancing the consensus estimate for a gain of 0.5%. Incomes rose by 0.2% slightly ahead of economists' guesstimates for a gain of 0.1%. Most importantly of all, the Personal Consumption Expenditure Index component of the report, the Fed's preferred measure of inflation pressure at the consumer level, posted a very modest gain of 0.2%. After a quick once over - mortgage investors didn't give this data another thought.

The march of macro-economic data continued when the Census Bureau reported October new home sales rose a stronger than expected 6.2% over the prior month level. As of October, new-home sales are running at their best pace since last fall. Once again mortgage investors were quick to discount this report - noting the sales strength is only evident in the South, with sales dropping decisively in the other three regions.

Rounding out this morning's string of economic reports was news from the Mortgage Bankers of America that their seasonally adjusted mortgage application index slipped 4.5% lower last week. The purchase index gained 9.6% while the refinance component of the index declined by 9.5%. The reason for the downward skew in the overall index is that refinance applications accounted for 71.7% of all application last week.

Uncle Sam is wrapping up this three-part borrowing spree this week with today's auction of $32 billion worth of 7-year notes. If the strong bias of the earlier two offerings prevails again today this event will not likely exert any notable influence on the trend trajectory of mortgage interest rates. In the unlikely event this offering is poorly bid - look for government debt yields and mortgage interest rates to edge higher.

Tuesday, November 24, 2009

Mortgage investors nudged rates fractionally lower this morning after a revision to the government's data for third-quarter economic growth came in just below expectations and fanned some doubt about the sustainability of the budding economic recovery.

The Commerce Department's second estimate of third-quarter economic output showed growth running at a 2.8% pace rather than the 3.5% annualized clip originally reported. It was the strongest level of economic growth since the third-quarter of 2007 and was driven in large part by government fiscal stimulus programs. If all of Uncle Sam's various "booster" shots designed to support third-quarter growth are removed, our domestic economy would have barely registered a pulse. As long as the economy remains on government sponsored life support -- any upward pressure on mortgage interest rates will likely be muted.

Another day - another government debt auction. Uncle Sam will be in the credit markets today looking to auction off a $42 billion stack of 5-year notes. Yesterday's 2-year note auction results were decent but unremarkable, marking a retreat from the string of spectacular sales results in recent months. Hopes are high that today's offering will be well bid. If so, this auction will likely be a non-event as far as its impact on the trend trajectory of mortgage interest rates is concerned. Keep your fingers crossed that this assessment proves accurate. A poorly bid note auction could very well create a "snowball-effect" that pushes both government debt yields and mortgage interest rates higher.

Monday, November 23, 2009

The credit markets are setting up for another huge dose of supply from Uncle Sam this week. The Treasury Department will be peddling $118 billion worth of 2-, 5- and 7-year notes over the course of the next three business days. The action starts this afternoon with the sale of $44 billion of 2-year notes.



Despite the supply pressure, recent government debt sales have drawn generally solid demand. At a minimum this week's offering will likely be welcomed by those players looking for a safe place to park cash until 2010. This week's auction schedule may create a little temporary choppiness in the mortgage market but the debt sales should pass without dramatically influencing the trend trajectory of mortgage interest rates much one way or the other.


The National Association of Realtors announced this morning that the pace of Existing Home Sales posted a surprisingly sharp 10.1% gain in October, following a similarly strong 8.8% gain in September. At 6.1 million annualized units, existing home sales are up nearly 24% compared with year ago levels and are currently running at their strongest pace since early '07. Even though the sales price of existing homes slid 7.1% lower as compared to last year -- it was the second consecutive month that the sales price slumped at a single-digit clip - making the October price dip a victory of sorts. The median price of an existing home in October was $173,100. Sales of previously owned homes, which make up more than 90% of the market, are complied from contract closings and may reflect purchases agreed upon weeks or months earlier.



The current condition of the housing market will be more accurately reflected when the October new home sales data is released on Wednesday (8:30 a.m. ET). The new home sales data is recorded when the contract is signed, not when the transaction closes, and is therefore considered by investors to be a far more timely indication of demand in the housing sector. Mortgage investors have an October New Home Sales gain of 4.5% already priced into their rate sheets. If the actual number closely approximates the forecast -- look for mortgage interest rates to remain little changed. A stronger than expected new home sales number will likely put some upward pressure on mortgage interest rates while a sharply lower than anticipated value will tend to support steady to perhaps fractionally lower rates.



FYI: Saint Louis Fed president James Bullard told reporters this weekend that he believes the central bank should keep alive its mortgage-related assets purchase program beyond its planned expiration at the end of March 2010. Bullard feels the program should be sustained at a "very low level" to give policymakers more flexibility as they work to extract the economy from a very painful recession. Mr. Bullard won't actually have a vote of policy matters until 2010.

Friday, November 20, 2009

Trading activity is very light in the mortgage market this morning. There is absolutely nothing in the way of economic data, debt supply or Federal Reserve speakers that will create a stir among mortgage investors today.

The few mortgage-backed security trades that have been completed so far in this session are likely taking their directional cues from the trajectory of stock prices. Falling stock prices tend to support steady to fractionally lower mortgage interest rates while rising stock prices tend to drag rates higher.

Yesterday the S&P posted its worst one-day percentage fall in three weeks. The resulting reallocation of capital from these riskier assets classes into "safe haven" investment vehicles like government debt obligations and mortgage-backed securities helped hold interest rates relatively steady just as rates appeared to be on the verge of drifting higher.


Looking ahead - the coming holiday shortened week will be a busy one. Monday's October Existing Home Sales figures together with Wednesday's New Home Sales number and the inflation component contained in the October Personal Income and Spending report will draw more than a passing glance from mortgage investors. Both housing reports are expected to show solid month-over-month improvements in the pace of sales -- driven in large part by the influence of the first-time home buyer tax-credit program. Most analysts see a very benign reading for inflation at the consumer level baked-into-the-cake for the personal consumption index component of the broader income and spending figures from last month. If these projections are "on-the-money" - there is nothing on next week's economic calendar that will likely serve to induce mortgage investors to push rates notably higher.


The government's borrowing needs are certainly not influenced in the least by major national holidays. The Treasury Department will be conducting a $44 billion 2-year note auction on Monday, a $42 billion 5-year note auction on Tuesday followed by a $32 billion 7-year note offering on Wednesday. That's a huge amount of supply to run into the credit market in a shortened week. Most analysts believe that these offerings will find solid demand, particularly by foreign investors. If that assessment proves accurate, the impact of these auctions on the trend trajectory of mortgage interest rates should be minimal.

STATED LOAN??

This loan program that I will describe is going to be catered to those clients – probably the higher-end clients – that are looking to purchase or refinance but can’t, due to debt-to-income reasons, credit, etc. This is an ASSET-BASED LOAN. Here are the Benefits:

-Fixed interest rates between 2.5% and 4.5%
- Interest-Only quarterly loan payments
- Loan terms of 3, 5, 7, or 10 years
- Low closing costs
- No credit check
- No income verification
- Funds may be used for any purpose including personal or business use
- Non-personal recourse loan. The only collateral are the pledged securities.
- Loans available for up to 80% of the securities value.
- The borrower receives all dividends and upside market appreciation on the securities
- Quick Fundings - usually in a matter of days

What Assets Qualify:
Securities that qualify as collateral are Publicly and Actively traded stocks, mutual funds, bonds and treasury notes that are not restricted in any manner. Most foreign securities are acceptable.

Those NOT Acceptable would be 401K, Commodities, Annuities, Money Markets, CD’s, etc.

Loan Minimums:
· Minimum Loan Amount is $100,000
· Minimum Loan Term is 3 Years

· ONCE AGAIN – No Verification of credit history, income, employment or the intended use of the funds.

This loan can be refinanced or renewed with the lender when their term ends. The big part to impart to your client – THIS IS A LOAN – NOT A BUY OR SALE – SO IT IS NOT REPORTED TO THE SEC, IT IS NOT TAXED BECAUSE IT IS NOT INCOME – IT IS A LOAN.

The loan could be tax-deductible if used for a Business Loan – consult your CPA. Maybe you have a commercial client or one that owns their own business – they could use this financing for an Operating Capital or Expense Capital and then it could be tax deductible.

Once again, you can use the loan for anything – it’s the client’s money; PURCHASE, REFINANCE, CASH-OUT, NEW CONSTRUCTION, RENOVATIONS, COMMERCIAL, INVESTMENT, RE-INVESTMENTS, BUSINESS LOAN, ETC.

Like I said – information like this gives you a reason to go to your clients and offer them a solution – you are their expert – you can direct them and help them and therefore they will ALWAYS be loyal to you!!

See how much more I offer than your Average LO??!!

Have a GREAT Weekend – Happy Selling and Be Safe in your Holiday Travels!! Please call me if you have any questions on Anything!!

drew

Thursday, November 19, 2009

The mortgage market is struggling to maintain its traction favoring fractionally lower mortgage interest rates and higher prices this morning.



Investors have little to chew-on in terms of macro-economic data. The Labor Department reported the number of Americans filing claims for unemployment benefits remained at a 10-month low last week, but the four-week moving average of claims dropped to its lowest level in almost a year. Applications for jobless assistance from the government have dropped significantly from their peak of 674,000 in March to the 505,000 level for the reporting period ended November 14th. Even so, the jobless claims number will need to drop to below 400,000 on a weekly basis to be consistent with labor market stability.



Many analysts remain skeptical of the validity of the weekly jobless claims numbers, arguing correctly that they don't accurately reflect the number of workers forced by necessity to participate in the government's extended benefit programs. For the week ended October 31st (the latest week for which data is available) enrollment in programs designed for those who have exhausted their normal 26 weeks of unemployment benefits grew by a total of 119,000. Boiling all this jobless claims data down to its bare essence it shows that while the pace of layoffs has slowed significantly - employers remain extremely hesitant to hang-out the "Now Hiring" signs.



The good news is that the slow pace of hiring will definitely continue to muzzle inflation threats and by extension will diffuse a considerable amount of any developing upward pressure on mortgage interest rates. The bad news part of this story is that until the national employment picture brightens considerably - the demand for mortgage financing will likely remain muted.

Wednesday, November 18, 2009

Trading in the mortgage market got off to a wobbly start this morning - buffeted by a mixed-bag of macro-economic news. A stronger-than-expected gain of 0.3% in the headline consumer price index was initially a bit unsettling for investors since it hinted at an uptick in inflation pressure on Main Street - a condition that put early upward pressure on mortgage interest rates.


Once market participants took the time to drill deeper into the data it became readily apparent that inflation pressures at the core level (a value stripped of the more volatile food and energy components) of the index remained extremely benign and the early upward pressure on mortgage interest rates quickly abated. It was essentially a "no-brainer" for investors since the data indicated that a spike in prices on used cars and trucks together with new vehicles accounted for more than 90% of the rise in core prices.



In a separate report the Commerce Department announced construction of new homes fell 10.6% on a seasonally adjusted basis in October, the lowest level since April and the biggest percentage drop since January. Roughly half of the outsized drop in the housing start figure was related to the very volatile multifamily segment of this data series. Total building permits fell 4.0% in October. As is the case with housing starts, the multifamily segment put a large negative dent in the total permits figure, with an 18% month-over-month decline.


The "so what" factor here is that the single-family segment of the housing industry is by far healthier than the raw data would lead you to believe. The slump in October residential construction was probably the result of the impending conclusion of the first-time homebuyer tax credit program. Buyers likely retreated from the new home market as it became increasingly risky that a home sale would be completed before the tax credit expired on November 30th. On this front, the extension and expansion of the tax credit for single-family purchase over the next three quarters will help substantially. Sustained growth in housing starts and building permits will not likely fully develop until national employment prospects brighten considerably.



Last week the borrowing costs on 30-year fixed rate mortgages, excluding fees, averaged 4.83%, down 0.07% from the previous week and the lowest since mid-May. Mortgage interest rates are hovering within shouting distance of the all-time record low of 4.61% set during the week ended March 27th -- yet according to data provided by the Mortgage Bankers of America -- the demand for home purchases dropped to a 12-year low last week.



The MBA said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, decreased 2.5% for the week ended November 13th. Purchase application requests were down 4.7% while refinance application activity dropped by 1.4%. Certainly the Obama administration's extension of the $8,000 first-time home buyer credit and the addition of the $6,500 credit for home owners buying a new residence will help forward looking loan demand. There is no doubt that lower rates, increased affordability indexes, lower property values and extended tax credits all help bring the dream of American homeownership closer to reality - but the key ingredient to a full recovery in the housing sector is still missing.


Without a solid and sustain improvement in the labor sector it really doesn't matter how low interest rates go or how much tax credit is offered - the pace of residential real estate sales will continue to wallow near historical lows. Hope for a better tomorrow and financial security drive home demand - tax credits and the current level of mortgage interest rates are only secondary considerations. The major of economists firmly believe a better tomorrow is coming - but the general agreement is that it probably won't begin to convincingly manifest itself until the mid part of next year. Those that find a way, any way, to make it from here to there, will no doubt be handsomely reward for their effort.

Tuesday, November 17, 2009

Trading activity in the mortgage market is quiet -- with a slight bias favoring higher prices and lower rates. Earlier in the day selling action in the mortgage-backed security market tried to force interest rates a touch higher -- but that little "dust-up" ended pretty quickly and the balance between buy and sell orders has drifted back in favor of the buyers.


The early morning swoon in the mortgage market was created by a knee-jerk reaction on the part of a relatively few traders to the detail contained the Labor Department's release of the October Producer Price Index. These market participants were evidently hyper-sensitive to the component of the report that indicated core prices for intermediate goods have not deviated from the steady climb to higher levels that began in early spring. That's really working hard to find a reason to sell since all of the other aspects of this report remained well below the consensus expectations.


The headline producer price index rose by a very modest 0.3% in October while the core producer price index (a value that excludes the more volatile food and energy prices) unexpectedly dropped 0.6% - its largest monthly decline since July 2006.
Calmer, cooler heads have now moved in to completely counter the earlier selling pressure in the mortgage market. These more experienced traders clearly know that with output and employment expected to remain modest well into the coming year, producer price inflation will likely be a "no show" for some time to come.


As expected, the separate October Industrial Production and Capacity Utilization report released later in this morning trading session drew little more than a passing glance from mortgage investors.

Monday, November 16, 2009

Earlier this morning the government reported the pace of October Retail Sales rose a brisk 1.4% -- but were much less impressive once auto sales were stripped out. The "ex. auto" component of this report posted a lower than expected gain of 0.2%. Even so, given the backdrop of a very anemic labor market, the October retail sales numbers were about as good as could be hoped.


Consumers remain financially constrained with wage income running 5.0% below its year-ago mark - a condition strongly suggesting recovery at the retail level will continue to be lethargic for many months to come. In the convoluted world of mortgage interest rates investors see slow retail sales activity as a indication that demand for capital will remain low - a scenario that tends to support steady to perhaps fractionally lower mortgage interest rates.



Definitely worth mentioning again - the Federal Reserve reached a milestone with its direct mortgage-backed purchase program last week, topping the $1 trillion mark. The Fed's purchases of agency mortgage-backed securities totals roughly $1.007 trillion so far in 2009. The central bank has started to slow the pace of its purchases, with buying decreasing from about $25 billion per week in mid-September to only $13.5 billion for the most current week ending Wednesday, November 11th. The Fed is committed to buying the entire $1.25 trillion allotted for its direct mortgage-backed security program by the end of March 2010.


These security purchases by the Fed have been hugely supportive of lower mortgage interest rates. (The following maybe a bit technical for some - but bear with me - and please don't stop reading.) The yield premium on Fannie Mae mortgage-backed securities paying 4.5% compared with the 10-year Treasury note (the assumed "riskless" rate of return) tightened to 0.668 percentage points last Thursday from 0.720 percentage points last Tuesday, according to Reuter's data. When yield premiums tighten - mortgage rates move lower. For comparison, the yield premium was around 1.863 percentage points last year prior to the initiation of the Fed's direct mortgage-backed security purchase program.



The "so what" factor here is probably obvious to most - mortgage interest rates are almost certain to begin a move to higher levels as the Fed's direct purchase program draws to close. Look for the pace of the upward move to be in direct, but opposite correlation to the number of dollars remaining in the central banks checkbook. The fewer dollars rolling around in the bottom of the Fed's bucket - the more intense the upward pressure on mortgage interest rates will become. Ultimately mortgage interest rates will once again reach their natural equilibrium point -- but until then -- the process of transition may be uncomfortable for those insistent upon trying to hope and wish rates to dramatically lower levels.

Friday, November 13, 2009

Trading volume in the mortgage market so far today has been light and sporadic - with the few transactions that are being completed drawing higher prices for the underlying security.


There is really not much to talk about in terms of economic news - even though some media sources are trying to make a mountain out of a mole hill with their breathless announcement that the University of Michigan's consumer sentiment index fell four (4) percentage points in October. Hmmm - let's see - I wonder if the fact the national jobless rate jumped to a 26-year high during the month might have bummed consumers out just a bit. I have yet to see one mainstream media report that drills down into the data deep enough to discover that while the index fell back to about the level seen in July and August -- it remains comfortably above its cyclical lows.


Take today's consumer sentiment report with a grain-of-salt. Mortgage investors are generally far more interested in what the consumer is actually doing - as opposed to how they say they are feeling during a telephone interview. Consumers' true underlying sentiment will be abundantly clear when the Commerce Department releases the October Retail Sales figures Monday at 8:30 a.m. ET. Interestingly enough, the headline number is expected to have posted a 0.9% gain - a handsome recovery from September's 1.5% slump. The ex. auto component of the report is expected to have matched September's 0.5% improvement. Not bad for the supposedly crestfallen consumer most media sources would have you believe currently dominates the retail marketplace.


****Definitely worth a mention - the Federal Reserve reached a milestone with its direct mortgage-backed purchase program this week, topping the $1 trillion mark. The Fed's purchases of agency mortgage-backed securities totals roughly $1.007 trillion so far in 2009. The central bank has started to slow the pace of its purchases, with buying decreasing from about $25 billion per week in mid-September to only $13.5 billion for the most current week ending Wednesday, November 11th. The Fed is committed to buying the entire $1.25 trillion allotted for its direct mortgage-backed security program by the end of March 2010.


These security purchases by the Fed have been hugely supportive of lower mortgage interest rates. (The following maybe a bit technical for some - but bear with me - and please don't stop reading.) The yield premium on Fannie Mae mortgage-backed securities paying 4.5% compared with the 10-year Treasury note (the assumed "riskless" rate of return) tightened to 0.668 percentage points on Thursday from 0.720 percentage points on Tuesday, according to Reuter's data. When yield premiums tighten - mortgage rates move lower. For comparison, the yield premium was around 1.863 percentage points last year prior to the initiation of the Fed's direct mortgage-backed security purchase program.


The "so what" factor here is probably obvious to most - mortgage interest rates are almost certain to begin a move to higher levels as the Fed's direct purchase program draws to close. Look for the pace of the upward move to be in direct, but opposite correlation to the number of dollars remaining in the central banks checkbook. The fewer dollars rolling around in the bottom of the Fed's bucket - the more intense the upward pressure on mortgage interest rates will become.


Ultimately mortgage interest rates will once again reach their natural equilibrium point -- but until then -- the process of transition may be uncomfortable for those insistent upon trying to hope and wish rates to dramatically lower levels. I'll keep you posted on the Fed's "burn rate" as this mortgage market friendly program fades into history.


Looking ahead to next week -- Monday's October Retail Sales figures and Wednesday's inflation data contained in the October Consumer Price Index will draw considerable investor attention. As I mentioned earlier in this commentary, the retail sales report has the potential to be a bit stronger than many market participants are anticipating. If such an event were to occur -- it will likely put some slight upward pressure on mortgage interest rates. The Consumer Price Index is expected to show the prices consumers are paying for goods and services remain devoid of meaningful inflation adjustments.

Thursday, November 12, 2009

Trading activity is thin this morning as investors await the results of this afternoon's $16 billion sale of 30-year bonds by the Treasury Department. This auction represents the last leg of a record-sized $81 billion three-part borrowing spree by Uncle Sam. The Treasury sold $40 billion of 3-year notes on Monday and $25 billion of 10-year notes on Tuesday. The 10-year sale drew decent demand while the 3-year note auction generated the strongest buyer appetite in more than 20 years.


One group of analysts is arguing the falling dollar will lure bargain shopping foreign investors in droves to today's 30-year bond sale. The opposing camp is equally convinced that now that the Fed is no longer actively adding to their fixed-income portfolio, these longer-dated securities will likely require higher yields to attract the necessary capital.


Everybody will be watching intently to see if demand steps up on its own. If so, interest rates in general -- and mortgage interest rates in particular --will likely remain little changed. On the other hand, if private demand is weak -- mortgage investors will almost certainly register their displeasure by pushing mortgage interest rates noticeably higher.


In other news of the day - the government reported the number of workers filing new claims for jobless benefits dropped by 12,000 last week. The four-week moving average of new claims, considered a better gauge of underlying trends, fell by 4,500 for the period. During the latest week for which data is available (week ended October 24th) enrollment in extended benefits programs decreased by 28,240 while the Emergency Unemployment Compensation program enrollment rose by 22,400.


Behind all this statistical mumbo-jumbo a story of very gradual improvement in the labor sector is beginning to emerge. Even so, it will likely be an extended period of time before the worst collapse in the labor sector since the Great Depression is declared officially over. Recent economic improvement has to be sustained for many months for hiring to resume, as businesses first increase existing worker hours and bring on temporary workers before increasing payroll head count. The majority of analysts firmly believe it will be well into the second-half of 2010 before the Labor Department's headline nonfarm payroll report shows any meaningful gains. Over the same time frame labor market data will tend to mute the development of upward pressure on mortgage interest rates emanating from other influences.


FYI: Earlier today the Mortgage Bankers of America said their seasonally adjusted index of total mortgage applications rose 3.2% during the week ended November 6th. Requests for refinance loans were up 11.3% while purchase applications slid 11.7% lower.

Tuesday, November 10, 2009

Trading activity is thin this morning as investors await the results of this afternoon's $25 billion sale of 10-year notes by the Treasury Department.


Market participants are divided in their opinion on whether today's record setting 10-year note auction will "coattail" off of yesterday's stellar 3-year note auction and go off without a hitch. Bids for Monday's 3-year note offering from Uncle Sam were the strongest in more than twenty-years.


One group of analysts is arguing the falling dollar will lure bargain shopping foreign investors in droves to today's 10-year note sale. The opposing camp is equally convinced that now that the Fed is no longer actively adding to their fixed-income portfolio, these longer-dated securities will likely require higher yields to attract the necessary capital.


Everybody will be watching intently to see if demand steps up on its own. If so, interest rates in general -- and mortgage interest rates in particular --will likely remain little changed. On the other hand, if private demand is weak -- mortgage investors will almost certainly register their displeasure by pushing mortgage interest rates noticeably higher.

Monday, November 9, 2009

Trading activity in the mortgage market is extremely subdued this morning as investors await the results of Uncle Sam’s record setting $40 billion auction of 3-year notes. The auction will conclude at 1:00 p.m. ET.


Demand will likely be solid for this offering as investors can earn an extra 0.50 percent point in yield as compared to the 2-year notes -- in exchange for taking only slightly more interest rate risk. The Fed’s continuing pledge to keep their benchmark short-term rates near zero and a very weak October payroll report will probably make this offer hard to resist for domestic and foreign investors alike.


Uncle Sam will return to the credit markets tomorrow afternoon looking to borrow $25 billion in 10-year notes and he’ll auction off a $16 billion stack of 30-year bonds on Thursday afternoon.

Even though demand for government debt has remained strong this year it is unclear whether strong results from today’s 3-year note auction will carry over to the two other auctions scheduled for this week. The Federal Reserve’s $300 billion Treasury purchase program ended last month, removing one element of demand from the bidding process. This week’s longer-dated auctions will be the first without direct participation from the Fed.

Everybody will be watching intently to see if demand steps up on its own. If so, interest rates in general -- and mortgage interest rates in particular --will likely remain little changed. On the other hand, if private demand is weak -- mortgage investors will almost certainly register their displeasure by pushing mortgage interest rates noticeably higher.

Friday, November 6, 2009

The mortgage market was buoyed in this morning's early going by a surprisingly weak labor sector snapshot.


The nation's jobless rate jumped to a reading of 10.2% in October -- matching its highest level since April 1983, while employers axed a steeper-than-expected 190,000 jobs last month. The average workweek length of just 33 hours did not move from the historic low set in September.


The bright spots in this morning's report were few - the government data wonks revised job losses for August and September to show 91,000 fewer jobs lost than first reported. Also worth noting was the fact that temporary employment has now risen for three consecutive months. Temporary employment always tends to accelerate in the early stages of a recovery in the labor sector as employers do everything possible to avoid adding permanent head-count until they are confident a sustained acceleration in economic activity is at hand. This reticence to add permanent jobs will not only forestall meaningful job growth, it will pose a drag on consumer spending - the engine that drives more than 70% of domestic economic activity.


Fixed income investors (those that buy and hold government debt obligations and mortgage-backed securities) are concerned that the government may feel compelled to develop another round of economic stimulus to replace the lack of spending at the consumer level. On its face it sounds like a very worth while and noble idea - but in practice it would lead to a massive expansion of government debt - a condition that would almost certainly put notable upward pressure on private borrowing costs of all sorts.


No one knows for sure how the current economic quagmire will be resolved - but if it involves issuing more government debt you can take-it-to-the-bank the prospects for lower mortgage interest rates will come out on the proverbial "short-end-of-the-stick."


Speaking of government debt, Uncle Sam will be in the credit markets next week looking to borrow a record setting $81 billion in the form of three- and 10-year notes together with a smattering of 30-year bonds on Monday, Tuesday, and Thursday respectively. The three-year notes will likely draw strong demand but the other two offerings may prove to be a problem. If so, it will probably be difficult, if not impossible for mortgage interest rates to move conspicuously lower over the coming five business days.


Next week's economic calendar offers nothing of consequence but does include a mortgage market holiday on Wednesday for the Veteran's Day Holiday.

Thursday, November 5, 2009

Mortgage investors will likely spend the balance of the day putting the finishing touches on their risk management strategies before moving to the safety of the sidelines in front of tomorrow morning's October nonfarm payroll report.


News from the Labor Department earlier today indicating third-quarter productivity surged 9.5% on an annualized basis spawned a rally in the stock market while data contained in the same report showing unit labor costs plunged 5.2% ignited some buying interest in the mortgage market.

Mortgage investors view the very powerful productivity gain and super-low labor costs as conditions reinforcing the Fed's ability to forgo any increase in their benchmark short-term interest rates for an "extended period of time" - and that is a condition that tends to be supportive of steady to perhaps fractionally lower mortgage interest rates.


In a separate report the Labor Department said the number of people receiving first-time jobless benefits fell by 20,000 last week to the lowest level since March. That is the good news portion of the current story from the labor market. The bad news is that during the week of October 17th enrollment in extended benefits programs increased by 24,600 while the Emergency Unemployment Compensation program enrollment rose by 90,000+.

In recovery, businesses generally first expand existing worker hours and hire temporary workers before more permanently expanding payroll size. Neither of these trends has shown signs of picking up yet, implying the near-term prospects for the job market remain fairly bleak.

The "so what" factor here is that against such a backdrop -- the power of a "surprise" improvement in the headline October nonfarm payroll figure to create a "Maalox Moment" in the mortgage market featuring rising rates and falling investor prices -- looses much of its potency.

Wednesday, November 4, 2009

Members of the Federal Open Market Committee have begun their final day of monetary policy deliberations. A post-meeting statement is expected to be released at 2:15 p.m. ET.


Most analysts believe the Fed will end their meeting with a reaffirmation of the stance they have maintained since March of this year -policies to support the economy will stay in place for some time, even as signs of recovery mount. In particular the nation's central bankers are not expected to soften their commitment to hold benchmark interest rates exceptionally low for "an extended period of time."

It wouldn't do the Fed much good at this point to alter their message to the marketplace -- since inflation remains benign and the sustainability of the recovery is still in doubt, even as signs of domestic economic improvement begin to peek over the horizon. Look for this event to exert little direct influence on the trend trajectory of mortgage interest rates today.


The Institute of Supply Management, a non-profit association composed of purchasing and supply managers, reported their service sector index posted a reading of 50.6% in October - somewhat disappointing after September's 50.9%. Still, there was little in this report that was surprising or charged mortgage investors perspective for the growth prospects of the largest segment of our economy.


In a separate report the Mortgage Bankers of America said their seasonally adjusted aggregate mortgage application index gained 8.2% last week - a mark that is 60.1% higher than where it stood one year ago. Requests for refinance loans were up 14.5% while purchase money loan requests were down 1.8%.


FYI: Congress is working on a plan to extend tax credit support to homebuyers. The new language in the Senate would allow homeowners who have lived in their home for five of the past eight years and who earn $125,000 or less for individuals or $225,000 for couples to receive a $6,500 tax credit. First-time homebuyers would still be eligible for an $8,000 tax-credit. The tax credit would apply for homes under contract by the end of April, although buyers would have until the end of June to close on the purchase. The Senate is expected to vote on this measure by the end of the week. The House, which would have to approve the measure before sending it to President Obama for his signature, is expected to take up the measure next week. More on this story as it become available.

Tuesday, November 3, 2009

GET OUT AND VOTE - YOU CANNOT COMPLAIN OR VOICE AN OPINION UNLESS YOU VOTE!!

Market participants will likely spend the next day holding their collective breath as they await the release of the Federal Open Market Committee's post-meeting statement scheduled for 2:15 p.m. ET tomorrow.


The members of the Federal Open Market Committee convened the first of a two-day monetary policy strategy session earlier this morning. Mortgage investors will be keenly interested to see what, if anything has changed in the Fed's thinking about the economy, government economic stimulus tactics and the appropriate level of short-term interest rates. In each of their post-meeting statements since March, the Fed has said it plans to keep interest rates "exceptionally low" for an "extended period."


There is a small chance the Fed may choose to do a little wordsmithing to the verbiage of their post-meeting statement this time around -- by dropping the phrase "exceptionally low" and/or "extended period" -- to clearly set the stage for a change in monetary policy in coming months. If this event were to occur -- holding out hope for notably lower mortgage interest rates would almost certainly be akin to betting on the worm to beat the feathers off of the robin.


Sooner or later the Fed is going to have to remove enough monetary policy support from the economy to see if it can stand on its own. In my opinion, as well as that of the vast majority of other analysts, the Fed will avoid any substantive change to their current strategies until the trend trajectory of employment turns higher for a least three consecutive months.


The likelihood that Friday's October nonfarm payroll report proves to be stronger than expected ramped up a couple of notches yesterday when detail in the October Institute of Supply Management report showed the manufacturing sector employment indexed jumped a sharp 6.9 points higher to 53.1.

The "so what" factor here is significant. It was the first time this economic metric has been above the expansionary threshold since July 2008, and it was the highest reading since 2006 -- and all of that sharply increases the risk of a "knee-jerk" reaction to the employment data that sends mortgage interest rates higher. Heads up.

Friday, October 30, 2009

It appears the mortgage market is poised to drift through the last trading day of October taking directional cues from trading activity in the stock markets. Lower stock prices will tend to support steady to fractionally lower mortgage interest rates. In the off-chance stock prices rally - look for mortgage investors to push rate sheet prices lower.


This morning's report of September Personal Income and Spending fell almost exactly on values most economists had projected - rendering the whole thing essentially toothless with respect to its influence on the trend trajectory of mortgage interest rates.


Looking ahead to next week the release of the Fed's post-meeting statement on Wednesday afternoon and the October nonfarm payroll numbers on Friday morning will dominate the macro-economic calendar. There is a chance the Fed will tweak the language in their statement to open the door for a potential short-term rate hike somewhere down the road.

Most believe economic conditions are still too fragile for the Fed to run the risk of upsetting the credit market's apple cart. If the consensus view proves accurate, the Fed meeting will come and go without exerting much, if any direct influence on the direction of mortgage interest rates. On the other hand, if the Fed chooses to do a little wordsmithing - and investors interpret the change to indicate the Fed is considering moving away from their accommodative monetary policy stance -- expect market participants to register their displeasure by pushing interest rates higher and prices lower.


The only threat of higher mortgage interest rates in Friday's nonfarm payroll data will be if the numbers prove to be significantly stronger than market participants now anticipate. In my judgment it will take a headline payroll number that shows job losses of 150,000 or less and/or a national jobless rate of 9.7% or lower and/or an average work week of 33.0 hours or more. The likelihood that one or any combination of these values actually appears in the Labor Department report is very small.

Thursday, October 29, 2009

Mortgage investors suffered a major "Maalox Moment" this morning when the government reported the economy grew at a significantly faster-pace than expected in the July through September period. The Commerce Department said their first estimate of Gross Domestic Product, a statistical measure of the value of all the goods and service produced in the country, showed a gain of 3.5%. The economic growth in the third-quarter of 2009 was the fastest since the third-quarter of 2007. The gain in third-quarter GDP was generally broad-based, with solid gains in consumer spending, exports and investment in home-construction.

It seems for the time being mortgage investors are simply glossing over the fact that the big gains in consumer spending and residential investment were largely driven by limited term government stimulus programs like "cash-for-clunkers" and the first-time homebuyer tax credit.


The latest gain in GDP growth stands in stark contrast to the 12 month period that ended in June 2009, a period when the economy turned in its worst performance in 70 years. The four consecutive quarterly GDP declines through the Q2 2009 marks the longest stretch of negative national economic growth since quarterly records began in 1947.


The question that bond traders and stock investors will be attempting to answer now has to do with the sustainability of economic growth. Was the outstanding third-quarter performance a "one-trick-pony," created by large amounts of government support - or was it another piece of evidence suggesting the Great Recession is coming to a close?


Some analysts point to the fact that if we strip out auto sales, production, and inventories, the economy grew at 1.9% last quarter - a very lethargic rate of growth at best. While I agree with the idea that modest growth is better than no growth at all - the likelihood of sustainable and meaningful economic growth is, in my judgment, still very much dependant on job growth. The consumer is the engine that drives more than 70% of our domestic economic activity -- and until the employment picture improves dramatically - the probabilities are high that the national economic growth prospects will remain anemic.


Speaking of employment -- a separate report from the Labor Department this morning showed the number of workers filing new claims for jobless benefits dipped by 1,000 during the week ended October 24th. The still-elevated numbers of continuing claims (a measure of those drawing benefits after the initial week) and those claiming extended benefits and support from the Emergency Unemployment Compensation program paints nothing but a very dismal picture of current conditions in the labor market.


Uncle Sam is conducting the last of this week's scheduled four-part Treasury auctions. On the block today is a $31 billion stack of 7-year notes. Since March of this year the Fed has been a relatively strong buyer of these securities. That is the good news. The bad news is their $300 billion dollar direct purchase program draws to a close today. The Fed as already spent $298.063 billion of their total allocation -- and they will drop the last of it on Treasury securities maturing in the next 4- to 7-years before the end of the day.


Keep your fingers crossed that the bidding at today's auction remains aggressive without the support of the Fed direct purchases. The more aggressive the bidding is for the 7-year notes -- the better the prospects for steady mortgage interest rates. If today's 7-year note sale is a bust - look for mortgage interest rates to edge higher before the end of the day.

Wednesday, October 28, 2009

The mortgage market got off to a friendly start this morning as lower-than-expected September new home sales figures offset encouraging data from the manufacturing sector that came in the form of surprisingly solid September Durable Goods numbers.


In a separate report the Mortgage Bankers of America reported their index of seasonally adjusted mortgage applications (a value that includes requests for both purchase and refinance loans) slipped 12.3% lower during the week ended October 23rd. Purchase applications were down 5.2% and refinance applications declined 16.2%. During the reporting period the average 30-year fixed-rate mortgage was 5.04%, down three basis-points from the prior week -- and down 122 basis-points from the year ago mark.


The mixed signal from the economy was enough to induce a round of selling in the stock markets. As capital leaves riskier asset classes like stocks - it is typically looking for a safe place in which to hang-out - and that is a condition that tends to make government debt obligations and mortgage-backed securities shine as an attractive sanctuary for these money flows. The more money that flows into the credit markets - and particularly into mortgage-backed securities - the more supportive it becomes of the prospects for steady to perhaps fractionally lower mortgage interest rates.


The timing of ramped-up selling pressure in the equity markets could not have come at a better time from a credit market perspective. Uncle Sam is conducting an auction today looking to borrow $41 billion in the form of 5-year notes. The more aggressive the bidding becomes for these securities -- the better the prospects for steady to perhaps fractionally lower mortgage interest rates. The first two legs of this week's Treasury auctions - Monday's $7 billion of 5-year inflation indexed securities and yesterday's $44 billion of 2-year notes - drew slightly better-than-expected demand. If today's 5-year note sale keeps the string alive this event's impact on the trend trajectory of mortgage interest rates will likely be very limited. In the off-chance today's 5-year note sale is a bust - look for mortgage interest rates to edge higher before the end of the day.

Tuesday, October 27, 2009

The mortgage market is off to a friendly start today after the Conference Board, a private research group, said its barometer on consumer confidence slipped to 47.7 in October from a revised 53.4 in September.


Detail in this morning's report showed consumers' assessment of present conditions dropped to its lowest level since February 1985 while the number of people who said jobs are hard to get increased to a reading of 49.6 -- its highest level since 1983. Consumers are obviously "bummed" in a big way - reviving worries among market participants about the sustainability of the economic recovery. The folks on Main Street are obviously still very fearful about their ability to get and hold a job, which is a clear threat to spending - and by extension - to the nation's prospects for recovery from the Great Recession.


In the convoluted world of the mortgage market -- slumping economic activity tends to reduce the demand for capital - which in-turn tends to be supportive of steady to perhaps fractionally lower rates. The growing likelihood of "Grinch-like" holiday sales may soon begin to take an increasingly large toll on stock valuations. If so, a significant amount of the capital fleeing these riskier asset classes will likely find its way into the "safe-harbor" of government debt obligations and mortgage-backed securities - and that's never a bad thing from a rate sheet perspective.


Uncle Sam will be in the credit market looking to borrow $44 billion in the form of 2-year notes today. The short-duration of these debt obligations -- together with the fact their yield is near its highest level in more than a month -- will likely combine to draw solid demand from global and domestic investors alike. Look for this event to have little, if any noticeable impact on the trend trajectory of mortgage interest rates today.

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Monday, October 26, 2009

The mortgage market was under siege earlier this morning as stock market gains curbed the safe-haven appeal of government debt obligations and mortgage-backed securities. The last thing the credit markets need is a distracting influence as Uncle Sam prepares to borrow a record volume of $123 billion in a four-part auction this week.


The government's borrowing binge will kick-off today with $7 billion of 5-year inflation-indexed securities followed by tomorrow's $44 billion in the form of 2-year notes, Wednesday's $41 billion of 5-year note sale and concluding on Thursday with a $31 billion 7-year notes offering.
So far this year, domestic and foreign investor demand for these debt obligations has been high - despite lingering anxiety over a ballooning U.S. government budget deficit and its potential impact on the long-term credit-worthiness of the United States.

As we come into this week's record setting debt offering the credit markets have a couple of things going for it that could be supportive of the prospects for solid auction demand - a condition which also tends to be supportive of a least steady mortgage interest rates.


(1) The stock markets appear to be in the early phase of a mild downward correction. If the assessment proves correct this relatively shallow correction that will likely continue through the Thanksgiving break. Falling stock prices tend to spawn "flight-to-quality" buying sprees favoring safe haven assets like government debt obligations and mortgage-backed securities. There is absolutely no reason to believe a swoon in the stock markets would not create the same result this time around.


(2) The value of the dollar has taken a beating on foreign currency exchanges -- and believe it or not - that is a situation that may actually serve to ramp-up demand for U.S. government debt obligations - especially by overseas investors. Those investors choosing to buy dollar-denominated assets with other more strongly valued currencies will be acquiring Uncle Sam's highest-quality debt instruments at "blue-light-special" prices -- on a currency adjusted basis.
A soft dollar stands a very good change of greasing-the-skids for this week's barrage of Treasury auctions - a scenario that will likely prove to be at worst -- mortgage market neutral.


There is, of course, a second side to this coin. If domestic and foreign investors choose to stay on the sidelines this week for whatever reason - look for mortgage interest rates to move higher. While such an outcome is certainly possible - at this juncture it does not appear to be highly probable.

Friday, October 23, 2009

As the week winds down mortgage investors are putting the final touches on their risk management strategies in front of next week's record setting deluge of government debt.
Uncle Sam will be in the credit markets looking to borrow a record volume of $123 billion in the form of two-, five-, and seven-year notes in tandem with a batch of 5-year inflation protected securities. The coming week's round of government borrowing handily beats the previous record of $115 billion set in July. S

o far this year, the massive amount of supply Uncle Sam has pumped into the credit markets has been absorbed without much problem -- simply because there is a lot of cash out there looking for a safe home. If trading action in the equity market is wobbly next week - it is likely these government debt obligations will be well bid -- causing them to exert little, if any upward pressure on mortgage interest rates. As always there is a flip-side to every coin, weak bidding at next week's government debt sale will almost certainly leach into the mortgage market -- producing higher rates and notably lower prices. At this juncture, there is reason to consider this latter scenario to be a low probability outcome.


Next week's schedule of macro-economic data will almost surely draw more than a passing glance from mortgage investors - particularly Thursday's first estimate of third-quarter Gross Domestic Product (8:30 a.m. ET) and the core personal consumption and expenditure component of the September Income and Spending data to be released at 8:30 a.m. ET on Friday. The majority of economists expect economic growth during the third-quarter accelerated at a brisk 3.3% pace. Mortgage investors have already priced-in that forecast as well expectations the core rate of inflation as measured by the September personal consumption and expenditure index did not exceed 0.2%. Should the actual numbers match or fall below these consensus forecast values - look for these economic reports to have little, if any noticeably impact on the trend trajectory of mortgage interest rates.


Earlier this morning the National Association of Realtors reported existing homes sales - including single-family, townhomes, condos and co-ops - jumped 9.4% higher last month. Lawrence Yun, NAR chief economist, said, "Much of the momentum is from people responding to the first-time buyer tax credit, which is freeing many sellers to take a trade and buy another home." The Association's data shows first-time home buyers accounted for more than 45% of home sales during the past year. A separate set of data shows that distressed homes accounted for 29% of transactions in September. Mortgage investors largely discounted the big surge in September existing home sales - reasoning the trajectory of sales will slip notably lower in the fourth-quarter following the expiration of the first-time home-buyer program at the end of November.


Stock market investors are continuing to make strong bets that corporate earnings will continue to "surprise" to the high side of expectations. The earnings season is still very young - with the majority of companies still due to turn in their third-quarter financial performance report cards. If these remaining companies successfully follow the current pattern of posting better-than-expected earnings -- stock markets will likely find sufficient justification continue to rally at the expense of fractionally higher mortgage interest rates.


On the other hand, if the remaining companies fail to solidly beat current earnings expectations, their stock price will likely begin to fall. The larger the number of under-performing companies (as compared to analysts' expectations) the stronger the likelihood stock markets will roll-over into a heavy sell-off - a condition that will tend to be strongly supportive of steady to fractionally lower mortgage interest rates.

Wednesday, October 21, 2009

Improving stock market performance driven by better-than-expected corporate earnings and the imminent retreat of the Federal Reserve as a direct buyer of Treasury debt are the "one-two punch" behind this morning's price swoon = HIGHER RATES = in the mortgage market.


So far in this early part of the corporate earnings season financial performance results from American businesses have generally exceeded analysts expectations, feeding speculation that the economy overall is solidly on the road to recovery. That growing mindset among capital sources has undermined the safe haven appeal of government debt obligations and mortgage-backed securities - resulting in upward pressure on mortgage interest rates.


The upward pressure on mortgage interest rates is being compounded as the Fed moves through the final stages of their commitment to directly purchase $300 billion of government debt obligations. They have already spent $297 billion of the funding available for this program. After today's small acquisition, they are scheduled to make their last purchase under current program guidelines on Thursday, October 29th. The exit of a big checkbook buyer from the market place has inevitably put some downward pressure on prices today - but the overall impact of the Fed's retreat will almost certainly be short-lived as freely trade markets tend to seek their natural balance points pretty quickly following a disruption. Investors' memories tend to be pretty short.


In other news of the day the Mortgage Bankers of America said their seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, slid 13.7% lower during the week ended October 16th. Applications to buy a home, a tentative indicator of sales, dropped 7.6% lower from the previous week while refinance applications fell 16.8%. The MBA said borrowing costs on 30-year fixed rate mortgages, excluding fees, rose 0.05 percentage points from the previous week to average 5.07%. This was above the all-time low of 4.61% set in March, but well below the 6.28% level of a year ago.