Trading action in the mortgage market is light and choppy as investors tend to move to the sidelines on the last trading day of the quarter. That is probably a wise strategy - since there is really nothing driving the market today. The light offering of economic data released earlier (Chicago area Purchasing Managers Index and the March Consumer Confidence figures) fell roughly in range of expectations rendering them completely toothless with respect to their influence on the direction of mortgage interest rates.
The Fed announced they will not make any purchases in the Treasury market today but they expect to re-enter as a buyer tomorrow and Thursday. Some market participants were disappointed with The Fed's rather feeble buying appetite on Monday. The central bank only bought $2.5 billion in longer-dated Treasury obligations yesterday, compared with $7.5 billion on both Thursday and Friday of last week. In my judgment the Fed is clearly demonstrating their acute awareness that "all-day suckers" never really last that long - so it is important to stretch out the relative good times for as long as possible.
Tuesday, March 31, 2009
Monday, March 30, 2009
Monday, March 30, 2009
Trading activity in the mortgage market is light and sporadic this morning.
The Federal Reserve was an active buyer of Treasury securities again this morning as the central bank continues its efforts to reduce consumer interest rates and stimulate economic growth. The central bank has announced plans to enter the credit market every day this week through April 2nd with the intention of buying a range of Treasury securities with varying maturity dates.
All of this Fed activity will likely serve to hold mortgage interest rates near current levels - at least temporarily. The money the Fed is spending is part of the $300 billion that it has allocated for the direct-purchase of Treasury obligations. While $300 billion sounds like a lot of money - it only amounts to roughly 15% of the $2+ trillion the government intends to borrow this fiscal year (ending in September).
There is no denying the Fed's direct-purchase program is helping sustain mortgage interest rates at levels that would not otherwise be available. That's the good news. The bad news is that it is not a question IF the Fed's financial punch-bowl will run dry - it is simply a matter of WHEN. Without significant new infusions of capital pumped into the system by the Fed or a major event driven "flight-to-quality" buying spree -- there is reason to believe we will do well to get through the second week of April without sustaining a noticeable uptick in mortgage interest rates. If assessments proves accurate, expect the central bank will be a less than active buyer of mortgage-backed securities through the last week of May - choosing instead to "keep-their-powder-dry" to support the more important late-spring early summer buying season in the housing market.
The few economic reports scheduled to be released during the early part of the week will be completely overshadowed by Friday's March Nonfarm payroll figures. Nobody expects the numbers to show any sign of job creation - but should the data indicate the pace of job loss is beginning to taper off --such news will likely tend to put some upward pressure on mortgage interest rates.
The Federal Reserve was an active buyer of Treasury securities again this morning as the central bank continues its efforts to reduce consumer interest rates and stimulate economic growth. The central bank has announced plans to enter the credit market every day this week through April 2nd with the intention of buying a range of Treasury securities with varying maturity dates.
All of this Fed activity will likely serve to hold mortgage interest rates near current levels - at least temporarily. The money the Fed is spending is part of the $300 billion that it has allocated for the direct-purchase of Treasury obligations. While $300 billion sounds like a lot of money - it only amounts to roughly 15% of the $2+ trillion the government intends to borrow this fiscal year (ending in September).
There is no denying the Fed's direct-purchase program is helping sustain mortgage interest rates at levels that would not otherwise be available. That's the good news. The bad news is that it is not a question IF the Fed's financial punch-bowl will run dry - it is simply a matter of WHEN. Without significant new infusions of capital pumped into the system by the Fed or a major event driven "flight-to-quality" buying spree -- there is reason to believe we will do well to get through the second week of April without sustaining a noticeable uptick in mortgage interest rates. If assessments proves accurate, expect the central bank will be a less than active buyer of mortgage-backed securities through the last week of May - choosing instead to "keep-their-powder-dry" to support the more important late-spring early summer buying season in the housing market.
The few economic reports scheduled to be released during the early part of the week will be completely overshadowed by Friday's March Nonfarm payroll figures. Nobody expects the numbers to show any sign of job creation - but should the data indicate the pace of job loss is beginning to taper off --such news will likely tend to put some upward pressure on mortgage interest rates.
Friday, March 27, 2009
Friday, March 27, 2009
Trading activity in the mortgage market is light and sporadic this morning.
The Federal Reserve was an active buyer of $7.5 billion of 2- and 3-year securities earlier today. Central banker’ spent a matching sum on Wednesday when they kicked off their program to acquire up to $300 billion in longer-dated Treasury obligations. The move, known as quantitative easing, is designed to serve as a temporary anchor to prevent interest rates (including mortgage interest rates) – from rising too quickly given the strain created by the current $2+ trillion government borrowing need. There is obviously a huge difference between the amount the Fed has available to spend in their effort to retard the rise of interest rates in general -- and the amount off supply the Treasury intends to dump into the credit market. In this endeavor the Fed is essentially taking a knife to a gunfight. Sure, they may draw a little attention initially – but they will undoubtedly be quickly overwhelmed – and when the inevitable happens – interest rates (including those on mortgages) will begin to move progressively higher.
Today’s macro-economic news had no influence on the current trend trajectory of mortgage interest rates.
The Commerce Department reported this morning that consumer spending rose for a second straight month even as incomes reversed the prior month’s gain. As most analysts expected, spending improved by 0.2% last month while incomes fell by 0.2%. The core rate of inflation (a value that excludes the more volatile food and energy components) at the consumer level proved to be a little “hotter” than expected – posting a gain of 0.2% instead of the modest 0.1% rise most economists had been forecasting.
Looking head to next week -- the few economic reports scheduled to be released during the early part of the week will be completely overshadowed by Friday’s February Nonfarm payroll figures. Nobody expects the numbers to show any sign of job creation – but if the data indicates the pace of job loss is beginning to taper off --such news will likely tend to put some upward pressure on mortgage interest rates.
As mentioned here before – from a technical perspective there are reasons to believe the recent rally in the stock market is living on borrowed time. If assessments proves accurate, the stock markets will experience a fairly sharp round of profit-taking that will perhaps push the value of the Dow back all the way down into the 7300 to 7100 value range. A swoon in the stock market of this magnitude, should it develop, will tend to be supportive of steady to fractionally lower mortgage interest rates. If such an event is going to occur – I think it will manifest itself no later than today, March 27th or Monday, March 30th.
The Federal Reserve was an active buyer of $7.5 billion of 2- and 3-year securities earlier today. Central banker’ spent a matching sum on Wednesday when they kicked off their program to acquire up to $300 billion in longer-dated Treasury obligations. The move, known as quantitative easing, is designed to serve as a temporary anchor to prevent interest rates (including mortgage interest rates) – from rising too quickly given the strain created by the current $2+ trillion government borrowing need. There is obviously a huge difference between the amount the Fed has available to spend in their effort to retard the rise of interest rates in general -- and the amount off supply the Treasury intends to dump into the credit market. In this endeavor the Fed is essentially taking a knife to a gunfight. Sure, they may draw a little attention initially – but they will undoubtedly be quickly overwhelmed – and when the inevitable happens – interest rates (including those on mortgages) will begin to move progressively higher.
Today’s macro-economic news had no influence on the current trend trajectory of mortgage interest rates.
The Commerce Department reported this morning that consumer spending rose for a second straight month even as incomes reversed the prior month’s gain. As most analysts expected, spending improved by 0.2% last month while incomes fell by 0.2%. The core rate of inflation (a value that excludes the more volatile food and energy components) at the consumer level proved to be a little “hotter” than expected – posting a gain of 0.2% instead of the modest 0.1% rise most economists had been forecasting.
Looking head to next week -- the few economic reports scheduled to be released during the early part of the week will be completely overshadowed by Friday’s February Nonfarm payroll figures. Nobody expects the numbers to show any sign of job creation – but if the data indicates the pace of job loss is beginning to taper off --such news will likely tend to put some upward pressure on mortgage interest rates.
As mentioned here before – from a technical perspective there are reasons to believe the recent rally in the stock market is living on borrowed time. If assessments proves accurate, the stock markets will experience a fairly sharp round of profit-taking that will perhaps push the value of the Dow back all the way down into the 7300 to 7100 value range. A swoon in the stock market of this magnitude, should it develop, will tend to be supportive of steady to fractionally lower mortgage interest rates. If such an event is going to occur – I think it will manifest itself no later than today, March 27th or Monday, March 30th.
Thursday, March 26, 2009
Thursday, March 26, 2009
Mortgage investors are just killing time this morning as they await the results of the last of this week’s three big note sales by the Treasury Department. The Treasury will wrap things up with this afternoon’s $24 billion 7-year note sale.
When the Treasury reintroduced seven-year notes last month after a 16-year hiatus, investors’ appetite was very weak. Concerns that today’s offering may draw tepid bidding as well will likely weigh on the credit market – resulting in a very lethargic start to the day for mortgage interest rates. Even though this is only the second 7-year note auction since 1993 – a fact which clouds up the technical picture a bit – I don’t think it would be all that surprising to see a little relief rally in the mortgage-backed securities market exert itself once the Treasury auction concludes at 1:00 p.m. ET.
Today’s macro-economic news was a mixed bag and had no influence on the current trend trajectory of mortgage interest rates.
The government downgraded its final fourth-quarter reading for Gross Domestic Product to -6.3% from the prior estimate of -6.2%. Even though the final revision was less steep than most analysts had anticipated there was no escaping the fact that the economy experienced its most violent contraction in a quarter since 1982.
The one slight bit of silver-lining in this data series came from the inventory measurement component which has fallen so low that it suggests businesses may soon find it necessary to ramp up manufacturing activities to return inventories to more normal levels. At this juncture in the economic cycle the prospects of an inventory rebuild certainly is nothing to write home about – look for it to morph into one of the primary catalysts that rekindles manufacturing activity -- perhaps before the second quarter is over.
To nobody’s surprise labor market conditions continue to deteriorate. The number of workers claiming jobless benefits climbed to a new record of 5.56 million during the week ended March 20th. The number of workers requesting unemployment benefits for the first-time rose by 8,000. Like the earlier Gross Domestic Product figures – this report also contained the slightest bit of silver-lining. The four-week moving average for new claims, considered by many economists to be a better gauge of underlying trends because it irons out week-to-week volatility, fell by 1,000 during the latest reporting. I know it doesn’t sound like much – but at least it stands as the first drop in this series after nine consecutive weeks of increase.
Today’s weekly jobless data didn’t mean a twit to mortgage investors -- but it may be worth at least a casual mention that this report may have contained the tiniest flicker of hope that the worst of the massive round of job destruction this economic cycle has generated may have passed.
When the Treasury reintroduced seven-year notes last month after a 16-year hiatus, investors’ appetite was very weak. Concerns that today’s offering may draw tepid bidding as well will likely weigh on the credit market – resulting in a very lethargic start to the day for mortgage interest rates. Even though this is only the second 7-year note auction since 1993 – a fact which clouds up the technical picture a bit – I don’t think it would be all that surprising to see a little relief rally in the mortgage-backed securities market exert itself once the Treasury auction concludes at 1:00 p.m. ET.
Today’s macro-economic news was a mixed bag and had no influence on the current trend trajectory of mortgage interest rates.
The government downgraded its final fourth-quarter reading for Gross Domestic Product to -6.3% from the prior estimate of -6.2%. Even though the final revision was less steep than most analysts had anticipated there was no escaping the fact that the economy experienced its most violent contraction in a quarter since 1982.
The one slight bit of silver-lining in this data series came from the inventory measurement component which has fallen so low that it suggests businesses may soon find it necessary to ramp up manufacturing activities to return inventories to more normal levels. At this juncture in the economic cycle the prospects of an inventory rebuild certainly is nothing to write home about – look for it to morph into one of the primary catalysts that rekindles manufacturing activity -- perhaps before the second quarter is over.
To nobody’s surprise labor market conditions continue to deteriorate. The number of workers claiming jobless benefits climbed to a new record of 5.56 million during the week ended March 20th. The number of workers requesting unemployment benefits for the first-time rose by 8,000. Like the earlier Gross Domestic Product figures – this report also contained the slightest bit of silver-lining. The four-week moving average for new claims, considered by many economists to be a better gauge of underlying trends because it irons out week-to-week volatility, fell by 1,000 during the latest reporting. I know it doesn’t sound like much – but at least it stands as the first drop in this series after nine consecutive weeks of increase.
Today’s weekly jobless data didn’t mean a twit to mortgage investors -- but it may be worth at least a casual mention that this report may have contained the tiniest flicker of hope that the worst of the massive round of job destruction this economic cycle has generated may have passed.
Wednesday, March 25, 2009
Wednesday, March 25, 2009
Investors are starting to get a little skittish about absorbing large quantities of government debt as they are asked to take on substantial inflation risk in return for very little reward. While Uncle Sam has had no trouble placing short-term debt with maturities up to 2-years - he has begun to find that longer-dated securities are increasingly harder to sell. The "so what" factor from a mortgage market perspective is significant.
The ratio of bids placed to securities sold (the so called "bid-to-cover" ratio) was very low in February and through the auctions of 3- and 10-year notes earlier this month. Many observers believe these low bid-to-cover ratio's confirm investors were looking for more yield than the government was willing to pay. These analysts believe the Federal Reserve was left with little choice but to announce last week it would start buying longer-dated Treasury securities in an effort to temporarily fill the aggressive buyer void. It is highly likely that without the presence of the Fed in the credit markets the yield on today's $34 billion Treasury debt offering of 5-year notes and tomorrow's $20 billion of 7-year notes would have ratcheted higher - likely dragging mortgage interest rates higher in the process. That's the good news.
The bad news is that the Fed's $300 billion war-chest for the direct purchase of Treasury obligations is "chump-change" compared to the government's overall borrowing need this fiscal year (ending in September) of $2+ trillion dollars. The Fed's $300 billion is a far more symbolic - rather than pragmatic sum. The Fed and more experienced market participants clearly know that all the Fed will be able to do with their direct-purchase funds is to forestall the otherwise inevitable rise in long-term borrowing costs (mortgage money included) across the economy.
The Treasury will conclude their auction of 5-year notes at 1:00 p.m. ET. Everybody will be interested to see whether the buying from the Fed today will be able to offset the size of the incoming supply.
Today's February Durable Goods Orders figure and the New Home Sales number briefly drew a little attention from mortgage investors. New orders for items manufactured to last three-year or more rose for the first-time in seven months in February. The Commerce Department said durable goods orders were up 3.4% last month, its biggest increase since December 2007. The February gain was in sharp contrast to the revised 7.3% plunge in orders in January. One month does not make a trend - but the improvement in durable goods orders offers a slight flicker of hope that the worst of the recession in the manufacturing sector may have passed.
In a separate report the Commerce Department announced that sales of newly built single-family homes unexpectedly rose at the fastest pace in 10-months during February. Sales rose 4.7% last month while the inventory of homes available for sale fell to the lowest level since June 2002. Even so, at the current sales pace there is still a 12.2 months supply of available homes on the market. Most analysts firmly believe that a bottom in the new home market will not be reached until the available homes for sales drops to a 10.5 month supply level.
The ratio of bids placed to securities sold (the so called "bid-to-cover" ratio) was very low in February and through the auctions of 3- and 10-year notes earlier this month. Many observers believe these low bid-to-cover ratio's confirm investors were looking for more yield than the government was willing to pay. These analysts believe the Federal Reserve was left with little choice but to announce last week it would start buying longer-dated Treasury securities in an effort to temporarily fill the aggressive buyer void. It is highly likely that without the presence of the Fed in the credit markets the yield on today's $34 billion Treasury debt offering of 5-year notes and tomorrow's $20 billion of 7-year notes would have ratcheted higher - likely dragging mortgage interest rates higher in the process. That's the good news.
The bad news is that the Fed's $300 billion war-chest for the direct purchase of Treasury obligations is "chump-change" compared to the government's overall borrowing need this fiscal year (ending in September) of $2+ trillion dollars. The Fed's $300 billion is a far more symbolic - rather than pragmatic sum. The Fed and more experienced market participants clearly know that all the Fed will be able to do with their direct-purchase funds is to forestall the otherwise inevitable rise in long-term borrowing costs (mortgage money included) across the economy.
The Treasury will conclude their auction of 5-year notes at 1:00 p.m. ET. Everybody will be interested to see whether the buying from the Fed today will be able to offset the size of the incoming supply.
Today's February Durable Goods Orders figure and the New Home Sales number briefly drew a little attention from mortgage investors. New orders for items manufactured to last three-year or more rose for the first-time in seven months in February. The Commerce Department said durable goods orders were up 3.4% last month, its biggest increase since December 2007. The February gain was in sharp contrast to the revised 7.3% plunge in orders in January. One month does not make a trend - but the improvement in durable goods orders offers a slight flicker of hope that the worst of the recession in the manufacturing sector may have passed.
In a separate report the Commerce Department announced that sales of newly built single-family homes unexpectedly rose at the fastest pace in 10-months during February. Sales rose 4.7% last month while the inventory of homes available for sale fell to the lowest level since June 2002. Even so, at the current sales pace there is still a 12.2 months supply of available homes on the market. Most analysts firmly believe that a bottom in the new home market will not be reached until the available homes for sales drops to a 10.5 month supply level.
Tuesday, March 24, 2009
Tuesday, March 24, 2009
Uncle Sam will be splashing around in the credit markets over the course of the next three-days looking to borrow $98 billion in the form of 2-, 5- and 7-year notes. The knowledge the Federal Reserve is waiting in the wings to buy Treasury debt obligations should assure that investor demand for these offerings will be solid. If my assessment proves accurate, the Treasury Department's three-part auction schedule this week will likely provide just enough distraction for investors that mortgage interest rates will remain flat - at least through the conclusion of the 7-year note auction at 1:00 p.m. Thursday, March 26th.
From a technical perspective there are reasons to believe the recent rally in the stock market is living on borrowed time before a fairly sharp round of profit-taking develops to push the value of the Dow back down into the 7300 to 7100 value range. A swoon in the stock market of this magnitude, should it develop, will tend to be supportive of steady to fractionally lower mortgage interest rates. If such an event is going to occur - I think it will manifest itself no later than Friday, March 27th or Monday, March 30th.
From a technical perspective there are reasons to believe the recent rally in the stock market is living on borrowed time before a fairly sharp round of profit-taking develops to push the value of the Dow back down into the 7300 to 7100 value range. A swoon in the stock market of this magnitude, should it develop, will tend to be supportive of steady to fractionally lower mortgage interest rates. If such an event is going to occur - I think it will manifest itself no later than Friday, March 27th or Monday, March 30th.
Monday, March 23, 2009
Monday, March 23, 2009
Trading in the mortgage market is off to a sluggish start this morning as investors direct their attention to the details of the Treasury's plan to set up public-private investment funds to buy up to $1 trillion in troubled loans and securities at the heart of the financial crisis.
Here's is a synopsis of how the plan will work.
· The Treasury will provide $75- to $100-billion to seed capital for public-private investment funds. These investment funds will combine taxpayer money with private capital. The investment funds are to be formed specifically to buy distressed loans from banks. The seed money the government will inject into these investment vehicles will come from the $700 billion financial rescue fund Congress approved last October.
· These investments funds will be able to use FDIC guaranteed debt to achieve a 6-1 debt-to-equity leverage ratio. That's a sweet deal. If private investors and the Treasury each contribute $1 billion to the investment fund, that entity can raise up to $12 billion in FDIC financing to purchase $14 billion in loans.
· Under this part of the program, banks would approach the FDIC with a pool of loans they want to sell. The FDIC would offer financing and the Treasury would partner with private investors to bid in organized auctions for the loans.
· Since the sale of these "toxic" assets will be made through a competitive auction progress (one investment fund bidding against the other) a market for loans and securities that otherwise could not be traded will be established. The competitive bidding process virtually assures the government will not pay to much as they help banks shed debt instruments that are severely limiting the banks available capital. The leverage offered by government financing to private investors ratchets up potential returns into double-digit ranges with minimal risk.
On its face, this is not a bad deal all the way around. The program will not likely become effective until late May, but the early reaction from investors around the globe indicates most believe the strategy outlined by the Treasury Department this morning might just work to revitalize the banking system. Since the details of the Treasury rescue plan were made public earlier this morning a handsome rally in the stock markets has developed - particularly in financial shares - as the prospects for economic growth ahead has now shown flickers of hope.
In other times mortgage investors might have responded to the hint of a future increase in the demand for capital (as banks take the first steps down the road to recovery) by nudging rates fractionally higher. Thank goodness the Fed is in the neighborhood with a fresh $750 billion in its back-pocket earmarked for the direct-purchase of mortgage-backed securities. Only a fool would try to trade against that kind of financial fire-power - and right now the Fed wants mortgage interest rates to remain near current levels.
The release of the February Existing Home Sales report was completely overshadowed by this morning's news events surrounding the Treasury's bank rescue plan. The National Association of Realtors said that existing home sales rose 5.1% last month - a much stronger performance than was expected. After a knee-jerk reaction related to the solid headline number -- mortgage investors shrugged the whole thing off when the details of the report revealed the sharp improvement in sales last month was largely created by significant price-cutting. Even with the sharp February sales gains the inventory of existing homes for sales rose by 5.2%. There is nothing here to suggest a bottom in the housing market has yet been reached.
Here's is a synopsis of how the plan will work.
· The Treasury will provide $75- to $100-billion to seed capital for public-private investment funds. These investment funds will combine taxpayer money with private capital. The investment funds are to be formed specifically to buy distressed loans from banks. The seed money the government will inject into these investment vehicles will come from the $700 billion financial rescue fund Congress approved last October.
· These investments funds will be able to use FDIC guaranteed debt to achieve a 6-1 debt-to-equity leverage ratio. That's a sweet deal. If private investors and the Treasury each contribute $1 billion to the investment fund, that entity can raise up to $12 billion in FDIC financing to purchase $14 billion in loans.
· Under this part of the program, banks would approach the FDIC with a pool of loans they want to sell. The FDIC would offer financing and the Treasury would partner with private investors to bid in organized auctions for the loans.
· Since the sale of these "toxic" assets will be made through a competitive auction progress (one investment fund bidding against the other) a market for loans and securities that otherwise could not be traded will be established. The competitive bidding process virtually assures the government will not pay to much as they help banks shed debt instruments that are severely limiting the banks available capital. The leverage offered by government financing to private investors ratchets up potential returns into double-digit ranges with minimal risk.
On its face, this is not a bad deal all the way around. The program will not likely become effective until late May, but the early reaction from investors around the globe indicates most believe the strategy outlined by the Treasury Department this morning might just work to revitalize the banking system. Since the details of the Treasury rescue plan were made public earlier this morning a handsome rally in the stock markets has developed - particularly in financial shares - as the prospects for economic growth ahead has now shown flickers of hope.
In other times mortgage investors might have responded to the hint of a future increase in the demand for capital (as banks take the first steps down the road to recovery) by nudging rates fractionally higher. Thank goodness the Fed is in the neighborhood with a fresh $750 billion in its back-pocket earmarked for the direct-purchase of mortgage-backed securities. Only a fool would try to trade against that kind of financial fire-power - and right now the Fed wants mortgage interest rates to remain near current levels.
The release of the February Existing Home Sales report was completely overshadowed by this morning's news events surrounding the Treasury's bank rescue plan. The National Association of Realtors said that existing home sales rose 5.1% last month - a much stronger performance than was expected. After a knee-jerk reaction related to the solid headline number -- mortgage investors shrugged the whole thing off when the details of the report revealed the sharp improvement in sales last month was largely created by significant price-cutting. Even with the sharp February sales gains the inventory of existing homes for sales rose by 5.2%. There is nothing here to suggest a bottom in the housing market has yet been reached.
Friday, March 20, 2009
Friday, March 20, 2009
It appears mortgage investors have been inundated with home-loan applications following the Fed's decision on Wednesday to ramp up their direct purchases of mortgage-backed securities by an additional $750 billion - bringing their total direct commitment to the mortgage market to more than $1.2 trillion dollars as part of their all-out effort to revive the housing sector.
It is probably hard for most readers to grasp the sheer size of this commitment - but maybe the following analogy will help. If you were to spend one-million dollars ($1,000,000) every calendar day until you had successfully spent $1 trillion dollars you would be engaged in this endeavor for a little more than 2,739 years.
As impressive as the size of the Fed's direct support for the mortgage market is - it pales in comparison to the $2+ trillion dollars the government will borrow before their fiscal year expires in September.
The "so what" factor here is significant. As the government moves massive amounts of supply into the credit markets - prices of government debt instruments fall - pushing up their rate-of-return to the investor. In order to compete for capital against the perceived "riskless rate of return" offered by government debt obligations - mortgage-backed securities are compelled to "sweeten the pot" by offering investors a higher rate-of-return than they can get from Uncle Sam.
In a nutshell, the Fed's decision to dramatically ramp up their direct purchases of mortgage-backed securities is designed to mitigate - for as long as possible - the upward pressure the government's gargantuan borrowing spree will put on mortgage interest rates. Even though some woefully misinformed media "talking-heads" are suggesting the Fed has become a major-player in the mortgage-backed securities market to facilitate their desire to drive mortgage interest rates to a specific level - the truth of the matter is the Fed is doing nothing more than pulling out all of the stops in an effort to delay the inevitable upward surge in the financing cost of single-family homes which is the inevitable residual of the Treasury Department's almost insatiable appetite for capital.
It would be a big surprise if 30-year fixed-rate mortgage interest rates were to move to 4.5% for any extended period of time. It is far more likely the Fed will consider their $1 trillion investment in the direct purchase of mortgage-backed securities a roaring success if, over the coming six- to nine-months, 30-year fixed-rate mortgage interest rates manage to hover between 4.75% (for borrowers with the absolute best credit rating) to a general 30-year fixed borrowing rate of 5.5% or so.
Confounding the Fed's effort to hold mortgage interest rates near recent historical lows is the fact that the mortgage industry lost significant capacity over the past 18 months. During the same period warehouse credit lines for many mortgage wholesalers were reduced and in some cases outright eliminated. These internal mortgage industry conditions are causing many borrowers to come to the realization that just because the face on their favorite financial or news network says mortgage interest rates for 30-year fixed rate mortgages should fall to 4.5% or lower -- those televised comments don't hold much water when the borrower actually moves into the market place to make loan application. The truth of the matter is wholesale mortgage lending sources may offer loans at any rate they choose - controlled only by competitive influences in the market place and the borrowers' willingness and ability to pay the offered rate.
A massive rally in the mortgage-backed securities market may make headline news - but it has no direct bearing on rate sheet pricing. The golden rule is very much the controlling influence with respect to residential mortgage finance - he/she who has the gold definitely makes the rules.
Looking ahead to the coming week Uncle Sam will be in the credit markets Tuesday through Thursday looking to borrow $98 billion in the form of 2-, 5- and 7-year notes. These auctions should be relatively well bid producing little if any ripple effect in the mortgage market - especially if central bankers choose to spend some of the $300 billion they set aside on Wednesday for the direct purchase of longer-term Treasury debt.
Next week's economic calendar will include a look at conditions in the housing sector with the release of the February Existing Home Sales figures on Monday and the February New Home Sales numbers on Wednesday. Both measures of home buying activity are expected to show a very slight improvement from the prior month's levels -- but not enough to create much of an influence on the trend trajectory of mortgage interest rates. The release of the February core Personal Consumption Expenditure Index (a component of the broader February Personal Income and Spending report) will likely show inflation at the consumer level was virtually non-existent last month. If so, this data series will likely be completely toothless with respect to its potential impact on mortgage interest rate levels.
It is probably hard for most readers to grasp the sheer size of this commitment - but maybe the following analogy will help. If you were to spend one-million dollars ($1,000,000) every calendar day until you had successfully spent $1 trillion dollars you would be engaged in this endeavor for a little more than 2,739 years.
As impressive as the size of the Fed's direct support for the mortgage market is - it pales in comparison to the $2+ trillion dollars the government will borrow before their fiscal year expires in September.
The "so what" factor here is significant. As the government moves massive amounts of supply into the credit markets - prices of government debt instruments fall - pushing up their rate-of-return to the investor. In order to compete for capital against the perceived "riskless rate of return" offered by government debt obligations - mortgage-backed securities are compelled to "sweeten the pot" by offering investors a higher rate-of-return than they can get from Uncle Sam.
In a nutshell, the Fed's decision to dramatically ramp up their direct purchases of mortgage-backed securities is designed to mitigate - for as long as possible - the upward pressure the government's gargantuan borrowing spree will put on mortgage interest rates. Even though some woefully misinformed media "talking-heads" are suggesting the Fed has become a major-player in the mortgage-backed securities market to facilitate their desire to drive mortgage interest rates to a specific level - the truth of the matter is the Fed is doing nothing more than pulling out all of the stops in an effort to delay the inevitable upward surge in the financing cost of single-family homes which is the inevitable residual of the Treasury Department's almost insatiable appetite for capital.
It would be a big surprise if 30-year fixed-rate mortgage interest rates were to move to 4.5% for any extended period of time. It is far more likely the Fed will consider their $1 trillion investment in the direct purchase of mortgage-backed securities a roaring success if, over the coming six- to nine-months, 30-year fixed-rate mortgage interest rates manage to hover between 4.75% (for borrowers with the absolute best credit rating) to a general 30-year fixed borrowing rate of 5.5% or so.
Confounding the Fed's effort to hold mortgage interest rates near recent historical lows is the fact that the mortgage industry lost significant capacity over the past 18 months. During the same period warehouse credit lines for many mortgage wholesalers were reduced and in some cases outright eliminated. These internal mortgage industry conditions are causing many borrowers to come to the realization that just because the face on their favorite financial or news network says mortgage interest rates for 30-year fixed rate mortgages should fall to 4.5% or lower -- those televised comments don't hold much water when the borrower actually moves into the market place to make loan application. The truth of the matter is wholesale mortgage lending sources may offer loans at any rate they choose - controlled only by competitive influences in the market place and the borrowers' willingness and ability to pay the offered rate.
A massive rally in the mortgage-backed securities market may make headline news - but it has no direct bearing on rate sheet pricing. The golden rule is very much the controlling influence with respect to residential mortgage finance - he/she who has the gold definitely makes the rules.
Looking ahead to the coming week Uncle Sam will be in the credit markets Tuesday through Thursday looking to borrow $98 billion in the form of 2-, 5- and 7-year notes. These auctions should be relatively well bid producing little if any ripple effect in the mortgage market - especially if central bankers choose to spend some of the $300 billion they set aside on Wednesday for the direct purchase of longer-term Treasury debt.
Next week's economic calendar will include a look at conditions in the housing sector with the release of the February Existing Home Sales figures on Monday and the February New Home Sales numbers on Wednesday. Both measures of home buying activity are expected to show a very slight improvement from the prior month's levels -- but not enough to create much of an influence on the trend trajectory of mortgage interest rates. The release of the February core Personal Consumption Expenditure Index (a component of the broader February Personal Income and Spending report) will likely show inflation at the consumer level was virtually non-existent last month. If so, this data series will likely be completely toothless with respect to its potential impact on mortgage interest rate levels.
Thursday, March 19, 2009
Thursday, March 19, 2009
FYI: The Obama administration launched a new website today to provide information about its mortgage modification and refinancing programs. As you may recall, the administration's housing assistance offers two major components including a refinancing program for current mortgages guaranteed by Fannie Mae and Freddie Mac for homes that have declined in value. The other big component of the program is a mortgage modification plan for those who can no longer afford their mortgages. The address for this website is www.makinghomeaffordable.gov.
Trading activity is subdued in the mortgage market as investors take time to consider the varied implications of yesterday's Fed action.
As you know, the members of the Federal Open Market Committee voted unanimously to not only ramp up their direct purchases of mortgage-backed securities by an additional $750 billion - but for the first time since 1960 the Fed will become a direct buyer of up to $300 billion of longer-dated Treasury obligations. On its face there is nothing but good news here for the prospects of steady to fractionally lower mortgage interest rates.
In addition to these two major mortgage market friendly events the Fed's Term Asset-Backed Securities Loan Facility (TALF) will kick-off today. This $200 billion program is designed to break the logjam in the short-term credit markets and allow funds to start flowing once again for credit card receivables, car and student loans and numerous other business credit facilities. If the program is successful the Fed is prepared to ratchet funding up to $1 trillion dollar level.
So why is trading action in the mortgage market so muted so far in today's trading action?
In order to achieve all these lofty objectives the Fed is printing money on a 24/7 basis - a process that could be building the foundation for one of the greatest periods of sharply rising prices for goods and services and skyrocketing interest rates the U.S. has ever seen. The Fed has its work cut out for it here. It will be a matter of timing and technique. Within the next few quarters the Fed will be called upon to simultaneously begin sopping up the massive supply of dollars it has injected into the global economic system in such a manner that it does not inadvertently turn the inflation beast loose -- while avoiding choking the life out of a reviving economy by becoming overly aggressive with their desire to avert an inflationary spiral. If the Fed is successful in this endeavor the health of the housing sector and the economy as a whole will be assured - if they fail -- it is likely we will all look back at this current period in our economic history and consider it the "good old days."
Against this dynamic and very fluid backdrop mortgage investors have elected to take a cautious "wait-and-see" approach before expanding or reducing the size of their portfolios - at least for the near-term.
Trading activity is subdued in the mortgage market as investors take time to consider the varied implications of yesterday's Fed action.
As you know, the members of the Federal Open Market Committee voted unanimously to not only ramp up their direct purchases of mortgage-backed securities by an additional $750 billion - but for the first time since 1960 the Fed will become a direct buyer of up to $300 billion of longer-dated Treasury obligations. On its face there is nothing but good news here for the prospects of steady to fractionally lower mortgage interest rates.
In addition to these two major mortgage market friendly events the Fed's Term Asset-Backed Securities Loan Facility (TALF) will kick-off today. This $200 billion program is designed to break the logjam in the short-term credit markets and allow funds to start flowing once again for credit card receivables, car and student loans and numerous other business credit facilities. If the program is successful the Fed is prepared to ratchet funding up to $1 trillion dollar level.
So why is trading action in the mortgage market so muted so far in today's trading action?
In order to achieve all these lofty objectives the Fed is printing money on a 24/7 basis - a process that could be building the foundation for one of the greatest periods of sharply rising prices for goods and services and skyrocketing interest rates the U.S. has ever seen. The Fed has its work cut out for it here. It will be a matter of timing and technique. Within the next few quarters the Fed will be called upon to simultaneously begin sopping up the massive supply of dollars it has injected into the global economic system in such a manner that it does not inadvertently turn the inflation beast loose -- while avoiding choking the life out of a reviving economy by becoming overly aggressive with their desire to avert an inflationary spiral. If the Fed is successful in this endeavor the health of the housing sector and the economy as a whole will be assured - if they fail -- it is likely we will all look back at this current period in our economic history and consider it the "good old days."
Against this dynamic and very fluid backdrop mortgage investors have elected to take a cautious "wait-and-see" approach before expanding or reducing the size of their portfolios - at least for the near-term.
Wednesday, March 18, 2009
Surprise, surprise, surprise. Fed Chairman Ben Bernanke and the other members of the Federal Open Market Committee stunned the credit markets with their announced plans to buy up to an additional $750 billion of mortgage-backed securities.
Market participants were further shocked by the Fed's plan to buy up $300 billion of longer-term U.S. government debt over the next six months. This event is nothing but mortgage market friendly and virtually assures mortgage interest rates will stay unusually low for an extend period of time.
The Fed chose to make no change to short-term interest rates - but that bit of news is almost akin to somebody asking what color Lady Godiva's eyes were. Who cares?!
Market participants were further shocked by the Fed's plan to buy up $300 billion of longer-term U.S. government debt over the next six months. This event is nothing but mortgage market friendly and virtually assures mortgage interest rates will stay unusually low for an extend period of time.
The Fed chose to make no change to short-term interest rates - but that bit of news is almost akin to somebody asking what color Lady Godiva's eyes were. Who cares?!
Wednesday, March 18, 2009
Tuesday, March 17, 2009
The trend trajectory of mortgage interest rates will likely be strongly dictated by trading action in the stock markets. Higher stock prices will tend to nudge mortgage interest rates higher -- while lower stock prices will tend to support steady to fractionally lower rates.
There are an increasing number of indicators suggesting the rally in the stock market that began in earnest last Tuesday is vulnerable to a downward correction, probably by the end of the week. From a timing perspective the strongest signature appeared yesterday, March 16th and the second strongest timing signature will occur on Friday, March 20th. Yesterday's late day sell-off in the Dow was an encouraging sign that my projection may indeed be accurate.
From a technical perspective a weak rally into the 7270 to 7370 value level as indexed to the Dow as a reasonable possibility - before a stronger more sustained sell-off in the stock markets develop. If my appraisal of the price action in the Dow proves accurate, look for the prospects of steady to fractionally lower mortgage interest rates to benefit from the flow of capital out of equities and into the relative safe harbor of Treasury obligations and mortgage-backed securities. Without help from a sell-off in the stock markets -- the path of least resistance for mortgage interest rates is to higher levels.
The start of the Federal Open Market Committee's two-day meeting has put trading action in the mortgage market into a holding pattern - at least until the Fed's post-meeting statement is released tomorrow afternoon at 2:15 p.m. ET. Mortgage investors want to hear whether Chairman Bernanke and his fellow central bankers are any closer to becoming direct buyers of Treasury obligations as part of an expanded effort to revive the economy and the financial system.
There is no doubt the Fed could drive mortgage interest rates yet lower if they entered the Treasury market as an aggressive purchaser with an astoundingly large checkbook. The "so what" factor here is simple and straightforward. As in any market place -- rising demand tends to push prices higher. As you well know -- in our world - when prices rise, interest rates fall. While it is certainly possible the Fed might choose this particular course of action it is not very probable.
In the judgment of many other analysts is far too early in the game for the Fed to inject the ailing economy with this particular antidote. The massive expansion of the Fed's balance sheet this strategy would require will likely be reserved for a heroic last ditch effort to rekindle the nation's economic engines - should all other current efforts fail. Look for mortgage investors to remain in their foxholes, with their helmets on and their heads down until they have a chance to dissect the Fed's post-meeting statement tomorrow afternoon.
Investors were certainly quick to shrug off this morning's news from the Commerce Department indicating that housing starts jumped 22.2% higher last month - its biggest single monthly rise since January of 1990. Building permits posted a more modest gain of 3.0% in February - a number that was still well above expectations. The idea that "one-month-does-not-a-trend-make" certainly applies here as much of the housing starts gains were predominately in the multi-family component of the report. Far milder weather in February than in January also likely contributed heavily to the outsize gains in the housing starts figures.
A separate report from the Labor Department revealed producer prices rose by less than expected in February while core prices (a value that excludes the more volatile food and energy components of the overall producer price index number) posted a slightly higher than expected gain. Investors did not hesitate for even a second to declare the February inflation picture at the wholesale level an inconsequential "wash."
Still to come on this week's macro-economic calendar is tomorrow's February Consumer Index. It is expected to show inflation pressures at the consumer remain level benign.
There are an increasing number of indicators suggesting the rally in the stock market that began in earnest last Tuesday is vulnerable to a downward correction, probably by the end of the week. From a timing perspective the strongest signature appeared yesterday, March 16th and the second strongest timing signature will occur on Friday, March 20th. Yesterday's late day sell-off in the Dow was an encouraging sign that my projection may indeed be accurate.
From a technical perspective a weak rally into the 7270 to 7370 value level as indexed to the Dow as a reasonable possibility - before a stronger more sustained sell-off in the stock markets develop. If my appraisal of the price action in the Dow proves accurate, look for the prospects of steady to fractionally lower mortgage interest rates to benefit from the flow of capital out of equities and into the relative safe harbor of Treasury obligations and mortgage-backed securities. Without help from a sell-off in the stock markets -- the path of least resistance for mortgage interest rates is to higher levels.
The start of the Federal Open Market Committee's two-day meeting has put trading action in the mortgage market into a holding pattern - at least until the Fed's post-meeting statement is released tomorrow afternoon at 2:15 p.m. ET. Mortgage investors want to hear whether Chairman Bernanke and his fellow central bankers are any closer to becoming direct buyers of Treasury obligations as part of an expanded effort to revive the economy and the financial system.
There is no doubt the Fed could drive mortgage interest rates yet lower if they entered the Treasury market as an aggressive purchaser with an astoundingly large checkbook. The "so what" factor here is simple and straightforward. As in any market place -- rising demand tends to push prices higher. As you well know -- in our world - when prices rise, interest rates fall. While it is certainly possible the Fed might choose this particular course of action it is not very probable.
In the judgment of many other analysts is far too early in the game for the Fed to inject the ailing economy with this particular antidote. The massive expansion of the Fed's balance sheet this strategy would require will likely be reserved for a heroic last ditch effort to rekindle the nation's economic engines - should all other current efforts fail. Look for mortgage investors to remain in their foxholes, with their helmets on and their heads down until they have a chance to dissect the Fed's post-meeting statement tomorrow afternoon.
Investors were certainly quick to shrug off this morning's news from the Commerce Department indicating that housing starts jumped 22.2% higher last month - its biggest single monthly rise since January of 1990. Building permits posted a more modest gain of 3.0% in February - a number that was still well above expectations. The idea that "one-month-does-not-a-trend-make" certainly applies here as much of the housing starts gains were predominately in the multi-family component of the report. Far milder weather in February than in January also likely contributed heavily to the outsize gains in the housing starts figures.
A separate report from the Labor Department revealed producer prices rose by less than expected in February while core prices (a value that excludes the more volatile food and energy components of the overall producer price index number) posted a slightly higher than expected gain. Investors did not hesitate for even a second to declare the February inflation picture at the wholesale level an inconsequential "wash."
Still to come on this week's macro-economic calendar is tomorrow's February Consumer Index. It is expected to show inflation pressures at the consumer remain level benign.
Monday, March 16, 2009
Monday, March 16, 2009
The trend trajectory of mortgage interest rates will likely be strongly dictated by trading action in the stock markets. Higher stock prices will tend to nudge mortgage interest rates higher while lower stock prices will tend to support steady to fractionally lower rates.
There is an increasing number of indicators suggesting the rally in the stock market that began in earnest last Tuesday is vulnerable to a downward correction by the end of the week. From a timing perspective the strongest signature appears today, March 16th. If the assessment with respect to the price action in the Dow proves accurate, look for the prospects of steady to fractionally lower mortgage interest rates to benefit from the flow of capital out of equities and into the relative safe harbor of Treasury obligations and mortgage-backed securities. Wthout help from a sell-off in the stock markets -- the path of least resistance for mortgage interest rates is to higher levels.
The members of the Federal Open Market Committee are gathering for a two-day session beginning tomorrow and ending with the release of their monetary policy statement at 2:15 p.m. ET on Wednesday. Investors will scrutinize every word and nuance of the statement as Fed Chairman Bernanke and his fellow central bankers outline their thinking on how best to help the economy with short-term rates already near zero. Those investors hoping the Fed will announce a formalized initiative to push-down mortgage interest rates by becoming a direct buyer of Treasury obligations will likely be disappointed.
It is highly probable the Fed will choose to give other programs already in place - including their newly launched TALF project (Term Asset-Backed Securities Loan Facility) - a chance to work before giving serious consideration to any other initiatives.
This week's economic calendar includes the release of the Producer Price Index on Tuesday and the companion Consumer Price Index on Wednesday. Both measures of inflation pressure are expected to remain benign and should therefore exert little if any influence on the direction of mortgage interest rates.
There is an increasing number of indicators suggesting the rally in the stock market that began in earnest last Tuesday is vulnerable to a downward correction by the end of the week. From a timing perspective the strongest signature appears today, March 16th. If the assessment with respect to the price action in the Dow proves accurate, look for the prospects of steady to fractionally lower mortgage interest rates to benefit from the flow of capital out of equities and into the relative safe harbor of Treasury obligations and mortgage-backed securities. Wthout help from a sell-off in the stock markets -- the path of least resistance for mortgage interest rates is to higher levels.
The members of the Federal Open Market Committee are gathering for a two-day session beginning tomorrow and ending with the release of their monetary policy statement at 2:15 p.m. ET on Wednesday. Investors will scrutinize every word and nuance of the statement as Fed Chairman Bernanke and his fellow central bankers outline their thinking on how best to help the economy with short-term rates already near zero. Those investors hoping the Fed will announce a formalized initiative to push-down mortgage interest rates by becoming a direct buyer of Treasury obligations will likely be disappointed.
It is highly probable the Fed will choose to give other programs already in place - including their newly launched TALF project (Term Asset-Backed Securities Loan Facility) - a chance to work before giving serious consideration to any other initiatives.
This week's economic calendar includes the release of the Producer Price Index on Tuesday and the companion Consumer Price Index on Wednesday. Both measures of inflation pressure are expected to remain benign and should therefore exert little if any influence on the direction of mortgage interest rates.
Friday, March 13, 2009
The mortgage market got off to a very strange start today. China's Premier Wen Jiabao said publicly that he's concerned about the safety of U.S. government debt. He went of to say he thinks China should aim to "fend off risk" by more broadly diversifying its $1.95 trillion investment portfolio. China holds almost a third of their foreign exchange reserves in U.S. Treasuries.
The "so what" factor attached to this event is significant. Now that the Chinese, one of the largest foreign buyers of U.S. debt instruments, are hinting that they may not be quite as aggressive buyers at future Treasury auctions -- the prospects for notably lower mortgage interest rates ahead has faded a bit more. The connection between the price of government debt instruments and the trend trajectory of mortgage interest rates is incontrovertible. You can "take-it-to-the-bank" that mortgage investors, already fretting about the gargantuan amount of government debt that has yet to make its way into the capital markets, will pace the floor a little more briskly as they consider the "what ifs" related to the potential diminished appetite of a major financier of American debt. Mortgage investors are keenly aware of the irrefutable connection between rising yields on Treasury obligations and the corresponding rise for mortgage interest rates.
Whether the Chinese Premier's comments were nothing more than a bit of off-the-cuff personal crumbling or truly a "heads up" with respect to a change in the Chinese government's attitudes toward U.S. Treasury debt has yet to be determined. Even so, it will likely serve to limit (at least near-term) the ability of mortgage interest rates to move notably lower from current levels.
Looking ahead to next week the Federal Open Market Committee will meet in a two-day session beginning on Tuesday and ending on Wednesday at 2:15 p.m. ET with the release of the committee's post-meeting statement. Market participants are virtually certain that the Fed will choose to leave short-term interest rates unchanged -- but observers will be interested to see what, if anything the Fed has to say regarding the possibility of the Federal Reserve Bank becoming a direct buyer of Treasury obligations. Next week's economic calendar includes the release of the Producer Price Index on Tuesday and the companion Consumer Price Index on Wednesday. Both measures of inflation pressure are expected to remain benign and should therefore exert little if any influence on the direction of mortgage interest rates.
The "so what" factor attached to this event is significant. Now that the Chinese, one of the largest foreign buyers of U.S. debt instruments, are hinting that they may not be quite as aggressive buyers at future Treasury auctions -- the prospects for notably lower mortgage interest rates ahead has faded a bit more. The connection between the price of government debt instruments and the trend trajectory of mortgage interest rates is incontrovertible. You can "take-it-to-the-bank" that mortgage investors, already fretting about the gargantuan amount of government debt that has yet to make its way into the capital markets, will pace the floor a little more briskly as they consider the "what ifs" related to the potential diminished appetite of a major financier of American debt. Mortgage investors are keenly aware of the irrefutable connection between rising yields on Treasury obligations and the corresponding rise for mortgage interest rates.
Whether the Chinese Premier's comments were nothing more than a bit of off-the-cuff personal crumbling or truly a "heads up" with respect to a change in the Chinese government's attitudes toward U.S. Treasury debt has yet to be determined. Even so, it will likely serve to limit (at least near-term) the ability of mortgage interest rates to move notably lower from current levels.
Looking ahead to next week the Federal Open Market Committee will meet in a two-day session beginning on Tuesday and ending on Wednesday at 2:15 p.m. ET with the release of the committee's post-meeting statement. Market participants are virtually certain that the Fed will choose to leave short-term interest rates unchanged -- but observers will be interested to see what, if anything the Fed has to say regarding the possibility of the Federal Reserve Bank becoming a direct buyer of Treasury obligations. Next week's economic calendar includes the release of the Producer Price Index on Tuesday and the companion Consumer Price Index on Wednesday. Both measures of inflation pressure are expected to remain benign and should therefore exert little if any influence on the direction of mortgage interest rates.
Thursday, March 12, 2009
Thursday, March 12, 2009
It is another very quiet start to the day in the mortgage market. Mortgage investors simply yawned at the surprise uptick in the February Retail Sales figures - especially since the weekly jobless claims report confirmed expectations for continued deterioration in the labor sector.
The Commerce Department's headline February Retail Sales figure slipped 0.1% after rising by a revised 1.8% in January. Most economists had projected February Retail Sales would plunge by 0.5% or more. The real surprise contained in the Commerce Department's report was news that once auto sales were washed-out of the data - retails sales posted a 0.7% increase last month.
The "so what" factor here is that all this statistical mumbo-jumbo clearly indicates the consumer is not completely wiped out. The trump to this better-than-expected news from the retail sector is data that shows the labor sector remains under withering downward pressure.
In a separate report, the Labor Department said this morning that while first time claims for jobless benefits rose by a modest 9,000 - the number of people remaining on the benefits roll after drawing an initial week of aid rose to a record 5.3 million last week. Until conditions in the labor sector show notable signs of recovery - mortgage investors are likely to continue to shrug off stronger-than-expected retail sales data - reasoning that sales are going nowhere on a sustained basis without job growth as the primary driver.
At 1:00 p.m. ET this afternoon the Treasury Department will wrap-up the last part of this week's three-part auction with the sale of $11 billion of 30-year bonds. Judging by how stable the 30-year Treasury bond has been trading through the first two-trading hours of the day - it looks like fixed-income investors expect buyers' appetite for this offering will be decent. If that assessment proves accurate, the impact of today's Treasury auction on the trend trajectory of mortgage interest rates should be essentially non-existent.
The Commerce Department's headline February Retail Sales figure slipped 0.1% after rising by a revised 1.8% in January. Most economists had projected February Retail Sales would plunge by 0.5% or more. The real surprise contained in the Commerce Department's report was news that once auto sales were washed-out of the data - retails sales posted a 0.7% increase last month.
The "so what" factor here is that all this statistical mumbo-jumbo clearly indicates the consumer is not completely wiped out. The trump to this better-than-expected news from the retail sector is data that shows the labor sector remains under withering downward pressure.
In a separate report, the Labor Department said this morning that while first time claims for jobless benefits rose by a modest 9,000 - the number of people remaining on the benefits roll after drawing an initial week of aid rose to a record 5.3 million last week. Until conditions in the labor sector show notable signs of recovery - mortgage investors are likely to continue to shrug off stronger-than-expected retail sales data - reasoning that sales are going nowhere on a sustained basis without job growth as the primary driver.
At 1:00 p.m. ET this afternoon the Treasury Department will wrap-up the last part of this week's three-part auction with the sale of $11 billion of 30-year bonds. Judging by how stable the 30-year Treasury bond has been trading through the first two-trading hours of the day - it looks like fixed-income investors expect buyers' appetite for this offering will be decent. If that assessment proves accurate, the impact of today's Treasury auction on the trend trajectory of mortgage interest rates should be essentially non-existent.
Wednesday, March 11, 2009
Wednesday, March 11, 2009
Trading activity in the mortgage market is very quiet so far in this morning's early going. The only scheduled event mortgage investors have to deal with today is the Treasury Department's auction of $18 billion worth of 10-year notes. The government will be accepting bids on this offering through 1:00 p.m. ET. As has been the case since the start of the year - the trend trajectory of Treasury yields and mortgage interest rates will likely be most strongly dictated by trading action in the stock markets. Higher stock prices will tend to put upward pressure on government debt returns and mortgage interest rates while lower stock prices will tend to be supportive of steady to perhaps fractionally lower rates across the board.
Any threat (at least temporarily) of sharply higher mortgage interest rates will be muted by the roughly $310 billion of buying power the Fed controls for the direct purchase of mortgage-backed securities. Fed Chairman Bernanke is prepared to instruct his agents to retard any sharp upward movement of mortgage rates by entering the mortgage-backed securities market as aggressive buyers. So far the Fed has effectively spent $190 billion in this manner - holding mortgage interest rates at lower levels than they would have otherwise been without the Fed's intervention. This mortgage-backed security purchasing authority for the Fed was established as a temporary counter-weight to the upward pressure the massive $2 trillion+ of new incoming supply from the Treasury will undeniably exert on mortgage interest rates.
Speaking of mortgage interest rates - the Mortgage Bankers of America reported this morning that as mortgage interest rates flirted with near record lows their mortgage application index, with includes request for both purchase money and refinance loans, edged 11.4% higher during the week ended March 6th. Purchase applications were 7.1% higher for the period while refinance applications climbed 13.3%
Any threat (at least temporarily) of sharply higher mortgage interest rates will be muted by the roughly $310 billion of buying power the Fed controls for the direct purchase of mortgage-backed securities. Fed Chairman Bernanke is prepared to instruct his agents to retard any sharp upward movement of mortgage rates by entering the mortgage-backed securities market as aggressive buyers. So far the Fed has effectively spent $190 billion in this manner - holding mortgage interest rates at lower levels than they would have otherwise been without the Fed's intervention. This mortgage-backed security purchasing authority for the Fed was established as a temporary counter-weight to the upward pressure the massive $2 trillion+ of new incoming supply from the Treasury will undeniably exert on mortgage interest rates.
Speaking of mortgage interest rates - the Mortgage Bankers of America reported this morning that as mortgage interest rates flirted with near record lows their mortgage application index, with includes request for both purchase money and refinance loans, edged 11.4% higher during the week ended March 6th. Purchase applications were 7.1% higher for the period while refinance applications climbed 13.3%
Tuesday, March 10, 2009
Tuesday, March 10, 2009
Mortgage investors begin the day dogged by the $63 billion of fresh supply that will be sloshing into the credit market from Uncle Sam over the course of the next three days. The 200+ point surge in stock prices right out of the gate this morning has caused some concern as well.
If major stock markets post solid gains this week the government's auction of $34 billion of 3-year notes today, tomorrow's $18 billion offering of 10-year notes and Thursday's $11 billion of 30-year bonds will likely be poorly bid as investors chase more "bang-for-their-buck" through equity (stock) purchases. Should this scenario develop - look for mortgage interest rates to edge higher as the week progresses. That's the bad news.
The good news is that the Fed still has roughly $310 billion of the original $500 billion it was allocated in January for the direct purchase of mortgage-backed securities. If mortgage interest rates begin to ratchet up too sharply you can bet Fed Chairman Bernanke will instruct his agents to retard this upward movement by entering the mortgage-backed securities market as aggressive buyers. It is worth noting that this strategy was never designed to move mortgage interest rates down to some specified level (remember the 4.0% 30-year fixed-rate rumors). The money the Fed has in its back-pocket is there as a temporary counter-weight to the upward pressure the massive $2 trillion+ of new incoming supply from the Treasury will undeniably exert on mortgage interest rates.
It is still believed among many that by Memorial Day of this year the lowest mortgage interest rates in a generation will likely have come and gone.
If major stock markets post solid gains this week the government's auction of $34 billion of 3-year notes today, tomorrow's $18 billion offering of 10-year notes and Thursday's $11 billion of 30-year bonds will likely be poorly bid as investors chase more "bang-for-their-buck" through equity (stock) purchases. Should this scenario develop - look for mortgage interest rates to edge higher as the week progresses. That's the bad news.
The good news is that the Fed still has roughly $310 billion of the original $500 billion it was allocated in January for the direct purchase of mortgage-backed securities. If mortgage interest rates begin to ratchet up too sharply you can bet Fed Chairman Bernanke will instruct his agents to retard this upward movement by entering the mortgage-backed securities market as aggressive buyers. It is worth noting that this strategy was never designed to move mortgage interest rates down to some specified level (remember the 4.0% 30-year fixed-rate rumors). The money the Fed has in its back-pocket is there as a temporary counter-weight to the upward pressure the massive $2 trillion+ of new incoming supply from the Treasury will undeniably exert on mortgage interest rates.
It is still believed among many that by Memorial Day of this year the lowest mortgage interest rates in a generation will likely have come and gone.
Monday, March 9, 2009
The economic calendar offers nothing of particular substance. The highlight of the week, from a macro-economic perspective, will be the Commerce Department's release of the February Retail Sales report at 8:30 a.m. ET on Thursday, March 12th. If the Retail Sales figures remain near unchanged from January levels - look for mortgage investors to interpret the data as a slight negative for the prospects of lower mortgage interest rates.
The opinion of most is the February Retail Sales headline figure will have to fall by 1.0% or more while the component of the report that excludes auto sales simultaneously posts a decline of at least 0.4% to induce mortgage investors to nudge mortgage interest rates lower from current levels. While such an outcome is possible - it is not very probable.
As it has been since the first of the year -- the trend trajectory of mortgage interest rates will likely be driven by two counter-weighted forces. On the one hand Uncle Sam's massive appetite for debt will tend to push prices on Treasury obligations lower - creating some upward pressure on mortgage interest rates.
This supply pressure can/will be offset in part or in total by further weakness in the stock markets. Should stocks continue to sell-off -- the bid for Treasury obligations and mortgage-backed securities will improve as surviving capital from the stock market swoon is shepherded into the safest investments available.
From a technical perspective there are an increasing number of indications suggesting the capitulation phase in the current sell-off in the stock markets will possibly be completed before the month is out. If that assessment proves accurate, the prospects for notably lower mortgage rates are growing increasingly dim.
The opinion of most is the February Retail Sales headline figure will have to fall by 1.0% or more while the component of the report that excludes auto sales simultaneously posts a decline of at least 0.4% to induce mortgage investors to nudge mortgage interest rates lower from current levels. While such an outcome is possible - it is not very probable.
As it has been since the first of the year -- the trend trajectory of mortgage interest rates will likely be driven by two counter-weighted forces. On the one hand Uncle Sam's massive appetite for debt will tend to push prices on Treasury obligations lower - creating some upward pressure on mortgage interest rates.
This supply pressure can/will be offset in part or in total by further weakness in the stock markets. Should stocks continue to sell-off -- the bid for Treasury obligations and mortgage-backed securities will improve as surviving capital from the stock market swoon is shepherded into the safest investments available.
From a technical perspective there are an increasing number of indications suggesting the capitulation phase in the current sell-off in the stock markets will possibly be completed before the month is out. If that assessment proves accurate, the prospects for notably lower mortgage rates are growing increasingly dim.
Friday, March 6, 2009
Friday, March 6, 2009
Remember when a massive 651,000 loss in headline nonfarm payrolls and a jump in the nation jobless rate to 8.1% (its highest mark since December 1983) would have spawned a towering rally in the mortgage market highlighted by notably lower mortgage interest rates??
News of the dismal dimensions reported this morning use to send capital screaming out of the equity markets and other macro-economic sensitive investment vehicles into the relative safe haven of Treasury obligations and mortgage-backed securities. But that's all so "old school" now.
Today the fact that "only" 651,000 jobs were "actually" lost in a single month draws nothing more than a disinterested passing glance and a yawn from mortgage investors. Why? Because the "whisper" numbers had mortgage investors bracing for a headline job loss of 800,000 or more. Since the "worst-case" scenario did not develop - many observers think a "relief rally" in the mortgage market might be possible before the day is out. While I would agree such an outcome is possible - I don't think it is very probable.
It is far more likely mortgage investors will spend the balance of the day doing some profit-taking and squaring up positions in front of next week's $63 billion Treasury auction. The unrelenting pressure created in the credit markets by the government's gargantuan appetite for capital will continue to hold ultimate trump over all other conditions and events - making it inescapably difficult for mortgage interest rates to move significantly lower from current levels. That is not to say there won't be days or perhaps even a week or two of improving conditions in the mortgage market - but eventually the law of supply and demand will reign supreme - you know the one I'm talking about - "when supply exceeds demand prices fall." In our world when prices fall - rate rise.
News of the dismal dimensions reported this morning use to send capital screaming out of the equity markets and other macro-economic sensitive investment vehicles into the relative safe haven of Treasury obligations and mortgage-backed securities. But that's all so "old school" now.
Today the fact that "only" 651,000 jobs were "actually" lost in a single month draws nothing more than a disinterested passing glance and a yawn from mortgage investors. Why? Because the "whisper" numbers had mortgage investors bracing for a headline job loss of 800,000 or more. Since the "worst-case" scenario did not develop - many observers think a "relief rally" in the mortgage market might be possible before the day is out. While I would agree such an outcome is possible - I don't think it is very probable.
It is far more likely mortgage investors will spend the balance of the day doing some profit-taking and squaring up positions in front of next week's $63 billion Treasury auction. The unrelenting pressure created in the credit markets by the government's gargantuan appetite for capital will continue to hold ultimate trump over all other conditions and events - making it inescapably difficult for mortgage interest rates to move significantly lower from current levels. That is not to say there won't be days or perhaps even a week or two of improving conditions in the mortgage market - but eventually the law of supply and demand will reign supreme - you know the one I'm talking about - "when supply exceeds demand prices fall." In our world when prices fall - rate rise.
Thursday, March 5, 2009
Thursday, March 5, 1009
In yesterday's commentary I provided a synopsis of the government's Home Affordability and Stability plan. If you are interested in more detailed information see the website www.financialstability.gov.
Today is another day - same old story. The direction of mortgage interest rates is being dictated by trading action in the stock markets. Since Friday, February 20th I have been writing in this space about a stock market plunge and the resulting support for the prospects of steady to fractionally lower mortgage interest rates it would create. In my judgment we are currently in the "sweet-spot" in terms of the amount of support mortgage interest rates can expect as a result of the swoon in global stock markets. Before the month is over I believe the worst of the sell-off in the stock markets will have passed.
As you undoubtedly know, markets are made up of both buyers and sellers. No matter how strong the desire to sell or buy may be - the transaction can not be completed without the opposing party directly participating in the transaction.
The "so what" factor here is extremely important - consider this - once all the sellers have been indentified and satisfied, that only leaves one component in the market place - active and aggressive buyers who suddenly realize they have the opportunity to acquire stocks at the low point in the market cycle. This market dynamic has never failed before and it will not fail this time around.
(An insider's opinion is the stock market as indexed by the Dow will put in a low on or about March 23rd.)
Against this backdrop the Treasury department will be looking to issue a river of $2.5 trillion of debt. Without the "flight-to-quality" support of capital fleeing the volatility of the stock markets for the relative save harbor of the Treasury market - treasury yields will rise and drag mortgage interest rates higher as they go.
The hope is that an increasing number of buyers will come to see the greatest mortgage financing opportunity in a generation is now available.
There is an old Chinese proverb that says, "Ever banquet must come to an end." The same can be said for cycles favoring lower mortgage interest rates.
Today is another day - same old story. The direction of mortgage interest rates is being dictated by trading action in the stock markets. Since Friday, February 20th I have been writing in this space about a stock market plunge and the resulting support for the prospects of steady to fractionally lower mortgage interest rates it would create. In my judgment we are currently in the "sweet-spot" in terms of the amount of support mortgage interest rates can expect as a result of the swoon in global stock markets. Before the month is over I believe the worst of the sell-off in the stock markets will have passed.
As you undoubtedly know, markets are made up of both buyers and sellers. No matter how strong the desire to sell or buy may be - the transaction can not be completed without the opposing party directly participating in the transaction.
The "so what" factor here is extremely important - consider this - once all the sellers have been indentified and satisfied, that only leaves one component in the market place - active and aggressive buyers who suddenly realize they have the opportunity to acquire stocks at the low point in the market cycle. This market dynamic has never failed before and it will not fail this time around.
(An insider's opinion is the stock market as indexed by the Dow will put in a low on or about March 23rd.)
Against this backdrop the Treasury department will be looking to issue a river of $2.5 trillion of debt. Without the "flight-to-quality" support of capital fleeing the volatility of the stock markets for the relative save harbor of the Treasury market - treasury yields will rise and drag mortgage interest rates higher as they go.
The hope is that an increasing number of buyers will come to see the greatest mortgage financing opportunity in a generation is now available.
There is an old Chinese proverb that says, "Ever banquet must come to an end." The same can be said for cycles favoring lower mortgage interest rates.
Wednesday, March 4, 2009
Wednesday, March 4, 2009
The mortgage market is sagging this morning, weighed down as trading activity in the stock markets show flickers of life and as investors brace for an announcement tomorrow of another massive round of Treasury borrowing.
The Treasury Department is expected to announce it plans to sell $33 billion of three-year notes on March 10th, $17 billion of 10-year notes on March 11th and $10 billion of 30-year bonds on March 12th - for an eye-popping total of $60 billion.
The "so what" factor here is that investors haven't yet fully digested the $94 billion they were served last week so appetites for this massive round of new supply may be fairly thin. If this assessment proves accurate, the government will likely find it necessary to "sweeten-the-pot" by offering higher returns on these securities which is a scenario that will almost certainly cause mortgage interest rates to edge higher as well.
The mortgage market is also struggling with President Obama's $275 billion Homeowner Affordability and Stability plan aimed at making refinancing easier for a select group of American homeowners. Here is a synopsis of the homeowner rescue concept:
The plan has three components. The first would help homeowners who are still current on their payments, but who are paying high interest rates and cannot refinance because they do not have enough equity in their homes, a problem afflicting growing numbers of people as housing values tumble.
A second component would assist about four million people who are at risk of losing their homes. It would provide incentives to lenders who alter the terms of loans to make them affordable for the troubled borrowers. (Editorial comment: Where else but in America can you borrow your down payment, take out a first and second lien and still be considered a homeowner.)
A third component would try to increase the credit available for mortgages in general by giving $200 billion of additional financial backing to Fannie Mae and Freddie Mac.
Beyond luring lenders with government money, the plan also calls on Congress to give bankruptcy judges the power to change the terms of mortgages and reduce the monthly payments.
The banking industry has vehemently fought that proposal for more than a year, saying it would make investors unwilling to finance future mortgage lending. But Democrats in Congress strongly support the idea and banking executives are putting up less resistance than before. In my judgment the law of unintended consequences is at play. As I mentioned before, if bankruptcy judges are given unilateral authority to modify an existing mortgage such an event immediately changes the risk profile of the underlying mortgage-backed security.
From a fixed-income investor's perspective -- risk begets rate -- which means future homebuyers will very likely wind-up paying higher interest rates so that a relative few can enjoy lower mortgage interest rates now. I don't know about you - but I personally question the wisdom of granting individuals who misrepresented their income and/or assets on their original mortgage application the benefit of taxpayer assistance now.
For those of you hoping to see refinance volume improve because of this homeowner rescue plan -- I fear you may be disappointed. The $75 billion that will be used to modify existing mortgages will flow through servicers - not originators. That's the bad news. The good news is the $200 billion that is scheduled to be given to Fannie Mae and Freddie Mac with likely find its way into the mortgage market - but at current rates - and through normal channels.
Speaking of production - the Mortgage Bankers of America reported this morning their seasonally adjusted mortgage application index, made up of both purchase and refinance loans, fell 12.6% last week. Refinance applications were down 15.3% for the period while the purchase index slumped 5.6%.
The Treasury Department is expected to announce it plans to sell $33 billion of three-year notes on March 10th, $17 billion of 10-year notes on March 11th and $10 billion of 30-year bonds on March 12th - for an eye-popping total of $60 billion.
The "so what" factor here is that investors haven't yet fully digested the $94 billion they were served last week so appetites for this massive round of new supply may be fairly thin. If this assessment proves accurate, the government will likely find it necessary to "sweeten-the-pot" by offering higher returns on these securities which is a scenario that will almost certainly cause mortgage interest rates to edge higher as well.
The mortgage market is also struggling with President Obama's $275 billion Homeowner Affordability and Stability plan aimed at making refinancing easier for a select group of American homeowners. Here is a synopsis of the homeowner rescue concept:
The plan has three components. The first would help homeowners who are still current on their payments, but who are paying high interest rates and cannot refinance because they do not have enough equity in their homes, a problem afflicting growing numbers of people as housing values tumble.
A second component would assist about four million people who are at risk of losing their homes. It would provide incentives to lenders who alter the terms of loans to make them affordable for the troubled borrowers. (Editorial comment: Where else but in America can you borrow your down payment, take out a first and second lien and still be considered a homeowner.)
A third component would try to increase the credit available for mortgages in general by giving $200 billion of additional financial backing to Fannie Mae and Freddie Mac.
Beyond luring lenders with government money, the plan also calls on Congress to give bankruptcy judges the power to change the terms of mortgages and reduce the monthly payments.
The banking industry has vehemently fought that proposal for more than a year, saying it would make investors unwilling to finance future mortgage lending. But Democrats in Congress strongly support the idea and banking executives are putting up less resistance than before. In my judgment the law of unintended consequences is at play. As I mentioned before, if bankruptcy judges are given unilateral authority to modify an existing mortgage such an event immediately changes the risk profile of the underlying mortgage-backed security.
From a fixed-income investor's perspective -- risk begets rate -- which means future homebuyers will very likely wind-up paying higher interest rates so that a relative few can enjoy lower mortgage interest rates now. I don't know about you - but I personally question the wisdom of granting individuals who misrepresented their income and/or assets on their original mortgage application the benefit of taxpayer assistance now.
For those of you hoping to see refinance volume improve because of this homeowner rescue plan -- I fear you may be disappointed. The $75 billion that will be used to modify existing mortgages will flow through servicers - not originators. That's the bad news. The good news is the $200 billion that is scheduled to be given to Fannie Mae and Freddie Mac with likely find its way into the mortgage market - but at current rates - and through normal channels.
Speaking of production - the Mortgage Bankers of America reported this morning their seasonally adjusted mortgage application index, made up of both purchase and refinance loans, fell 12.6% last week. Refinance applications were down 15.3% for the period while the purchase index slumped 5.6%.
Tuesday, March 3, 2009
Tuesday, March 3, 2009
I'll skip all the rhetoric and cut right to the chase - the direction of mortgage interest rates is currently being directly dictated by trading activity in the stock markets. As stock prices fall - mortgage interest rates edge lower - and as stock prices rally - mortgage interest rates creep higher.
There is no escaping the fact that so far this year mortgage interest rates have been completely unable to sustain a rally to lower levels without significant "flight-to-quality" support of capital fleeing the stock markets in search of a safe harbor. Many opinions are that the DJIA is poised to initiate one more down-leg into the low-6,000's range possibly looking for this price target to potentially be achieved before the end of the month. If that assessment proves accurate, the bottom in the DJIA will likely be completely confirmed by June and before Labor Day stock prices will be engaged in a slow but steady climb to higher levels.
If this forecast is anywhere close to right with these projections (granted, that has yet to be seen) the greatest mortgage financing opportunity in a generation is now available -- to those with enough foresight to recognize it.
There is no escaping the fact that so far this year mortgage interest rates have been completely unable to sustain a rally to lower levels without significant "flight-to-quality" support of capital fleeing the stock markets in search of a safe harbor. Many opinions are that the DJIA is poised to initiate one more down-leg into the low-6,000's range possibly looking for this price target to potentially be achieved before the end of the month. If that assessment proves accurate, the bottom in the DJIA will likely be completely confirmed by June and before Labor Day stock prices will be engaged in a slow but steady climb to higher levels.
If this forecast is anywhere close to right with these projections (granted, that has yet to be seen) the greatest mortgage financing opportunity in a generation is now available -- to those with enough foresight to recognize it.
Monday, March 2, 2009
Monday, March 2, 2009
It is definitely worth noting that so far this year mortgage interest rates have been completely unable to sustain a rally to lower levels without significant "flight-to-quality" support of capital fleeing the stock markets in search of a safe harbor. The trend trajectory of the stock markets in the coming days and weeks will strongly determine the direction of mortgage interest rates.
Should the stock markets continue to sell off hard - look for such an event to be supportive of steady to fractionally lower mortgage rates. On the other hand, should the stock markets mount a sustained move to higher share prices such an event will almost surely push mortgage interest rates higher.
The entire docket of the week's upcoming economic reports will likely take a far backseat to the directional dynamics between stocks and interest rates. Economists and investors have projected lousy data well into the third-quarter of the year. Even Friday's nonfarm payroll report will likely draw nothing more than a passing glance from mortgage investors unless the employment picture proves to be better-than-expected. While such an outcome is possible - it is certainly not very probable.
For what it is worth manufacturing contracted in February for the 13th consecutive month. The Institute of Supply Management factory index rose to a reading of 35.8 last month from the 35.6 in January. The fractional improvement was welcome - but as long as the index remains below 50.0 analysts will consider the manufacturing sector to be in a period of contraction.
The Commerce Department also chimed in this morning with a report that showed spending rebounded 0.6% in January, snapping six months of declines while incomes rose. The surge in spending was attributed to massive discounts offered by retailers looking to reduce high inventory levels. The 0.4% rise in January incomes was almost all a function of cost-of-living adjustments for government employees.
Should the stock markets continue to sell off hard - look for such an event to be supportive of steady to fractionally lower mortgage rates. On the other hand, should the stock markets mount a sustained move to higher share prices such an event will almost surely push mortgage interest rates higher.
The entire docket of the week's upcoming economic reports will likely take a far backseat to the directional dynamics between stocks and interest rates. Economists and investors have projected lousy data well into the third-quarter of the year. Even Friday's nonfarm payroll report will likely draw nothing more than a passing glance from mortgage investors unless the employment picture proves to be better-than-expected. While such an outcome is possible - it is certainly not very probable.
For what it is worth manufacturing contracted in February for the 13th consecutive month. The Institute of Supply Management factory index rose to a reading of 35.8 last month from the 35.6 in January. The fractional improvement was welcome - but as long as the index remains below 50.0 analysts will consider the manufacturing sector to be in a period of contraction.
The Commerce Department also chimed in this morning with a report that showed spending rebounded 0.6% in January, snapping six months of declines while incomes rose. The surge in spending was attributed to massive discounts offered by retailers looking to reduce high inventory levels. The 0.4% rise in January incomes was almost all a function of cost-of-living adjustments for government employees.
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