False dawn - or the beginning of a sustained move to lower mortgage interest rates? That's the question mortgage investors are asking themselves this morning. For the moment, nobody is quiet sure what to make of today's welcomed rally in the mortgage market.
There are those who strongly believe the rally is nothing more than a pre-weekend profit-taking move by "short-sellers" cashing in on the market crash of Wednesday and Thursday. (A "short-seller" is one who sells an asset they don't currently own (typically borrowed from a dealer) in hopes of buying that asset back at a lower price and pocketing the difference as profit.)
Others argue the Fed will make good on their very public statements to maintain interest rates paid by consumers and businesses at accommodative levels for as long as it takes for the economy to get back on its feet. This camp believes the Fed will expand their size of their "financial war chest" and become an even more aggressive direct-buyer of mortgage-backed securities and Treasury debt obligations. Many analysts in this group believe the Fed may authorize an increase in the size of their direct purchase programs before gathering formally at the next regularly scheduled Federal Open Market Committee meeting on June 23 - 24th.
Many believe this scenario is a stretch. Central bankers will not want to appear as though they are reacting to every market swing -- for fear of losing creditability in the global investment community. If the capital for significant expansion of their direct purchase programs is going to be authorized - it won't be granted in a breathless rush.
I think it is critically important that all the participants in the mortgage cycle - from borrowers to agents as well as we the LO's don't loose sight of the purpose of the Fed's direct-purchase program. The Fed is engaged in nothing other than an all-out effort to fight a delaying action against the inevitable upward pressure on all consumer and business interest rates (not just mortgages) that the record shattering borrowing appetite of the government will inevitably create.
The Fed's objective is not to push mortgage interest rates to a "magic" level - it is simply to hold the door open to the most attractive mortgage financing opportunities in a generation for as long as possible - before the weight of the government debt load ultimately overwhelms the Fed's support - and the door to artificially low interest rates slams shut for decades to come.
Next week's economic calendar is crammed full of everything from Monday's Income & Spending report to Wednesday's Service Sector activity index to Friday's much anticipated May Nonfarm Payroll report. Expect increased mortgage market volatility as the week progresses.
Friday, May 29, 2009
Thursday,May 28, 2009
Trading activity in the mortgage market so far this morning is thin and sporadic. Investors are staggering around as they attempt to pick-up-the-pieces following yesterday's stunning price beat-down.
The fuse of the price collapse the in mortgage market yesterday was lit by market participants' growing concern about the ever-expanding debt needed to fund the government's effort to revive the economy. These fears began to whip the winds of panic which was all it took to set off a powder keg of extension risk hedging (see yesterday's commentary for more on this subject) in the mortgage market. In the end, trading in the mortgage market completely devolved from rationally based transactions into a weak-kneed, thumb-sucking emotionally driven selling stampede.
As the dust begins to settle and the smoke clears - the last of this week's record tying $101 billion supply dump from the Treasury Department is still in front of us. The Treasury will auction $26 billion of 7-year notes today. The auction will conclude at 1:00 p.m. ET. This event will likely determine whether the credit markets begin to climb out of the crater created by yesterday's collapse.
The concern here is that the longer the maturity of the debt instrument offered, the more exposed the prospective investor will be to inflation, which erodes the value of the investment over time. The fact that Tuesday's 2-year note and yesterday's 5-year note auction were very well bid by both domestic and foreign investors offers no guarantee that these market participants will have a big appetite for today's offering. A well bid auction will likely build a base for at least a little "relief" rally in the Treasury and mortgage-backed securities market this afternoon. On the other hand, should the 7-year note auction be poorly bid - look for more selling pressure to wash through the credit markets as current holders of longer-dated government debt obligations and mortgage-backed securities look to get out while the getting is good.
As a side note the Fed was a "no show" in the mortgage market yesterday - and that was probably wise on their part. Why attempt to catch a falling knife when you can pick-it-up off of the floor in another second or two? Mortgage investors will be keenly interested to see, what, if any action the Fed chooses to take in the post Treasury auction trading session. Will the Fed move aggressively to buoy mortgage interest rates at current or fractionally lower levels - or are they willing to wait for further confirmation a meaningful bottom is in place? Quite frankly I don't have the slightest clue how the Fed will react - but it is safe to assume if they aren't buying - mortgage interest rates are not likely going to move notably lower.
The fuse of the price collapse the in mortgage market yesterday was lit by market participants' growing concern about the ever-expanding debt needed to fund the government's effort to revive the economy. These fears began to whip the winds of panic which was all it took to set off a powder keg of extension risk hedging (see yesterday's commentary for more on this subject) in the mortgage market. In the end, trading in the mortgage market completely devolved from rationally based transactions into a weak-kneed, thumb-sucking emotionally driven selling stampede.
As the dust begins to settle and the smoke clears - the last of this week's record tying $101 billion supply dump from the Treasury Department is still in front of us. The Treasury will auction $26 billion of 7-year notes today. The auction will conclude at 1:00 p.m. ET. This event will likely determine whether the credit markets begin to climb out of the crater created by yesterday's collapse.
The concern here is that the longer the maturity of the debt instrument offered, the more exposed the prospective investor will be to inflation, which erodes the value of the investment over time. The fact that Tuesday's 2-year note and yesterday's 5-year note auction were very well bid by both domestic and foreign investors offers no guarantee that these market participants will have a big appetite for today's offering. A well bid auction will likely build a base for at least a little "relief" rally in the Treasury and mortgage-backed securities market this afternoon. On the other hand, should the 7-year note auction be poorly bid - look for more selling pressure to wash through the credit markets as current holders of longer-dated government debt obligations and mortgage-backed securities look to get out while the getting is good.
As a side note the Fed was a "no show" in the mortgage market yesterday - and that was probably wise on their part. Why attempt to catch a falling knife when you can pick-it-up off of the floor in another second or two? Mortgage investors will be keenly interested to see, what, if any action the Fed chooses to take in the post Treasury auction trading session. Will the Fed move aggressively to buoy mortgage interest rates at current or fractionally lower levels - or are they willing to wait for further confirmation a meaningful bottom is in place? Quite frankly I don't have the slightest clue how the Fed will react - but it is safe to assume if they aren't buying - mortgage interest rates are not likely going to move notably lower.
Thursday, May 28, 2009
***UPDATE*** Wednesday, May 27, 2009
Update:
The question I've heard most consistently throughout the day is, "What the hell happened to our mortgage market and to interest rates??"
The following may seem an unusual way to answer your question, but bear with me just a little bit. I think I can provide a clear answer to this question - without burying those with less credit market experience in a bunch of technical credit market mumbo-jumbo. Those with a more developed knowledge of credit market function will find an explanation in the last three paragraphs of this section of this update.
Let's assume you have invested your hard-earned money in a $1,000 certificate of deposit that will pay interest of 4.5% annually on your principal. You have willingly made the investment for 2-years with the full knowledge you can't get your principal back until the end of that period of time. For the sake of this example - let's further assume the institution holding your money has the right to extend your commitment time beyond 2-years if interest rates in general rise -- but they are under no obligation to pay you one penny more in terms of your interest rate.
This last particular feature could be a problem - but only if interest rates rise. As long as interest rates in general stay below 4.5% you'll get your principal back in 2-years -- and you will have made what you deem to be an acceptable return on your money given the risks associated with the transaction. So far - so good, right?
The extension risk associated with your new certificate of deposit keeps waking you up at night - you generally like the transaction structure -- but you would be much more comfortable with it if you could find a way to offset the institution's ability to keep your money for a longer period of time than 2-years in a rising interest rate environment.
All you need to do is find a way to profit from failing prices and rising rates in the credit market - and you will have successfully developed a method to offset the majority of any loss you might incur on your certificate of deposit should interest rates in general begin to rise.
You ask around and learn that there is indeed a way to "hedge" the extension risk of your certificate of deposit. When interest rates are rising (a bad thing in terms of your extension risk) the prices of private and government CD's are falling. To your delight you discover that in the credit market it is possible to sell an asset you don't currently own - and if the price of that asset falls -- you can buy the asset back and keep the profit. In the business they call it going "short" (see ** below for more detailed explanation)
A model using the yield on the 2-year Treasury note is developed as your baseline index to enable you to anticipate future interest rate movement. According to your model, should the yield on the 2-year Treasury note move above 3.61% -- the probabilities are high that interest rates in general will begin rising - and that is a condition that prompts you to spring into action to offset the extension risk related to your 4.5% certificate of deposit. For reasons that go beyond the scope of this example you choose to sell the 2-year Treasury note "short" as a hedge against financial damage you might suffer as a result of rising interest rates. You determine that the extension risk on your CD can largely be offset by the gains you make on the "short sale" of the 2-year Treasury note (as interest rise -- prices fall). Should interest rates settle down and you decide you don't need your CD hedge anymore -- all you have to do is buy the 2-year Treasury note back at the market price - and you're done - until perhaps you find it necessary to put the hedge on again at some later date. No fuss . no muss.
Actual experience shows that as mortgage interest rates rise -- borrowers with low note rates become increasing less likely to sell their homes, refinance or in any other way pay off their mortgage early. This tendency is known as extension risk in the mortgage industry - and it was at the core of today's hard sell-off in the mortgage market.
Mortgage investors (actual long-term holders of mortgage-backed securities like insurance companies, hedge funds, mutual funds, big money center banks, foreign sovereign governments and others) deemed it necessary to hedge the extension risk of their mortgage-backed security portfolios as the yield on the 10-year Treasury note moved above 3.61% earlier today.
The majority of these market participants chose to "short-sale" the 10-year Treasury note - a process that pushed the yield of the Treasury note even higher - and yet models to trigger additional mortgage portfolio extension risk hedges. As the afternoon progressed some investors decided rather than attempting to hedge their extension risk under fast market conditions- they would simply sell their mortgage-backed securities outright. The ensuing snowball effect of these two strategies resulted in the very ugly numbers in the mortgage market at the end of the day.
Looking ahead - if a retracement rally is going to develop in the mortgage market tomorrow - in my opinion it will likely begin in earnest after the close of the Treasury's $26 billion 7-year note auction at 2:00 p.m. ET.
**Here's a quick overview of how "selling-short" works:
Let's say the price of an asset you sold "short" at $2.00 falls to $1.65.
You, the "short" seller, can choose to buy the asset back at the current market price of $1.65 -- and pocket a marketing gain of 35 cents. If you decide to hold off with your buy order -- and the price of the asset you sold "short" falls further to $1.05 - you, the "short" seller, have a marketing gain of 95 cents.
But what if the price of the asset you sold at $2.00 moves higher rather than lower you ask?
The answer is painfully straightforward - you will incur a marketing loss for every penny higher price moves before you jump into the market place and buy-back the asset you sold "short". In a "short" sell transaction -- no matter which way the price of the asset goes - ultimately, in order to close the transaction, the asset is going to have to be purchased. This may be way more than you wanted to know - but I hope you see it is actually a significant part of the answer to your original question.
The question I've heard most consistently throughout the day is, "What the hell happened to our mortgage market and to interest rates??"
The following may seem an unusual way to answer your question, but bear with me just a little bit. I think I can provide a clear answer to this question - without burying those with less credit market experience in a bunch of technical credit market mumbo-jumbo. Those with a more developed knowledge of credit market function will find an explanation in the last three paragraphs of this section of this update.
Let's assume you have invested your hard-earned money in a $1,000 certificate of deposit that will pay interest of 4.5% annually on your principal. You have willingly made the investment for 2-years with the full knowledge you can't get your principal back until the end of that period of time. For the sake of this example - let's further assume the institution holding your money has the right to extend your commitment time beyond 2-years if interest rates in general rise -- but they are under no obligation to pay you one penny more in terms of your interest rate.
This last particular feature could be a problem - but only if interest rates rise. As long as interest rates in general stay below 4.5% you'll get your principal back in 2-years -- and you will have made what you deem to be an acceptable return on your money given the risks associated with the transaction. So far - so good, right?
The extension risk associated with your new certificate of deposit keeps waking you up at night - you generally like the transaction structure -- but you would be much more comfortable with it if you could find a way to offset the institution's ability to keep your money for a longer period of time than 2-years in a rising interest rate environment.
All you need to do is find a way to profit from failing prices and rising rates in the credit market - and you will have successfully developed a method to offset the majority of any loss you might incur on your certificate of deposit should interest rates in general begin to rise.
You ask around and learn that there is indeed a way to "hedge" the extension risk of your certificate of deposit. When interest rates are rising (a bad thing in terms of your extension risk) the prices of private and government CD's are falling. To your delight you discover that in the credit market it is possible to sell an asset you don't currently own - and if the price of that asset falls -- you can buy the asset back and keep the profit. In the business they call it going "short" (see ** below for more detailed explanation)
A model using the yield on the 2-year Treasury note is developed as your baseline index to enable you to anticipate future interest rate movement. According to your model, should the yield on the 2-year Treasury note move above 3.61% -- the probabilities are high that interest rates in general will begin rising - and that is a condition that prompts you to spring into action to offset the extension risk related to your 4.5% certificate of deposit. For reasons that go beyond the scope of this example you choose to sell the 2-year Treasury note "short" as a hedge against financial damage you might suffer as a result of rising interest rates. You determine that the extension risk on your CD can largely be offset by the gains you make on the "short sale" of the 2-year Treasury note (as interest rise -- prices fall). Should interest rates settle down and you decide you don't need your CD hedge anymore -- all you have to do is buy the 2-year Treasury note back at the market price - and you're done - until perhaps you find it necessary to put the hedge on again at some later date. No fuss . no muss.
Actual experience shows that as mortgage interest rates rise -- borrowers with low note rates become increasing less likely to sell their homes, refinance or in any other way pay off their mortgage early. This tendency is known as extension risk in the mortgage industry - and it was at the core of today's hard sell-off in the mortgage market.
Mortgage investors (actual long-term holders of mortgage-backed securities like insurance companies, hedge funds, mutual funds, big money center banks, foreign sovereign governments and others) deemed it necessary to hedge the extension risk of their mortgage-backed security portfolios as the yield on the 10-year Treasury note moved above 3.61% earlier today.
The majority of these market participants chose to "short-sale" the 10-year Treasury note - a process that pushed the yield of the Treasury note even higher - and yet models to trigger additional mortgage portfolio extension risk hedges. As the afternoon progressed some investors decided rather than attempting to hedge their extension risk under fast market conditions- they would simply sell their mortgage-backed securities outright. The ensuing snowball effect of these two strategies resulted in the very ugly numbers in the mortgage market at the end of the day.
Looking ahead - if a retracement rally is going to develop in the mortgage market tomorrow - in my opinion it will likely begin in earnest after the close of the Treasury's $26 billion 7-year note auction at 2:00 p.m. ET.
**Here's a quick overview of how "selling-short" works:
Let's say the price of an asset you sold "short" at $2.00 falls to $1.65.
You, the "short" seller, can choose to buy the asset back at the current market price of $1.65 -- and pocket a marketing gain of 35 cents. If you decide to hold off with your buy order -- and the price of the asset you sold "short" falls further to $1.05 - you, the "short" seller, have a marketing gain of 95 cents.
But what if the price of the asset you sold at $2.00 moves higher rather than lower you ask?
The answer is painfully straightforward - you will incur a marketing loss for every penny higher price moves before you jump into the market place and buy-back the asset you sold "short". In a "short" sell transaction -- no matter which way the price of the asset goes - ultimately, in order to close the transaction, the asset is going to have to be purchased. This may be way more than you wanted to know - but I hope you see it is actually a significant part of the answer to your original question.
Wednesday, May 27, 2009
Wednesday,May 27, 2009
The mood in the credit markets is ugly this morning as the Treasury Department lines up to dump $35 billion of 5-year notes on investors already staggering under the weight of the government's massive borrowing spree.
The Fed is active in the market as a buyer again today - with authorization to spend up to $300 billion to support steady to fractionally lower rates for consumers and businesses. The objective is noble - but the financial firepower is weak. Compared to the $2.5 trillion dollars of supply from Uncle Sam scheduled to wash through the credit market before the end of the government's fiscal year in September - the Fed appears to be engaged in an almost meaningless effort to drain the ocean with a teaspoon.
Credit market investors are in a particularly bad humor this morning as General Motors bondholders have rejected the latest restructuring offer from the company's management. The likelihood that the government will soon be called upon to inject "massive" amounts of capital into the automaker simply compounds credit market concerns about the size of future government borrowing. The "so what" factor here from a mortgage perspective is straightforward - increased debt obligations flushing into the credit market from the government will push Treasury prices lower - and in our world when prices fall - interest rates rise.
This morning's release of the April Existing Home Sales figure was almost completely overshadowed by investor nervousness surrounding today's 5-year Treasury note auction and growing anxiety about tomorrow's bigger hurdle of $26 billion in the form of 7-year notes The National Association of Realtors said purchases increased 2.9% on an annualized basis last month. Distressed sales accounted for 45% of all transactions. The inventory of homes for sale increased 8.7% as more homes were listed during the popular spring selling season.
In a related, but separate report the Mortgage Bankers of America said their seasonally adjusted index of loan applications to purchase or refinance a home fell by 14% during the week ended May 22nd. The refinance component of the index fell by 14% while the purchase component gained 1.0%.
The Fed is active in the market as a buyer again today - with authorization to spend up to $300 billion to support steady to fractionally lower rates for consumers and businesses. The objective is noble - but the financial firepower is weak. Compared to the $2.5 trillion dollars of supply from Uncle Sam scheduled to wash through the credit market before the end of the government's fiscal year in September - the Fed appears to be engaged in an almost meaningless effort to drain the ocean with a teaspoon.
Credit market investors are in a particularly bad humor this morning as General Motors bondholders have rejected the latest restructuring offer from the company's management. The likelihood that the government will soon be called upon to inject "massive" amounts of capital into the automaker simply compounds credit market concerns about the size of future government borrowing. The "so what" factor here from a mortgage perspective is straightforward - increased debt obligations flushing into the credit market from the government will push Treasury prices lower - and in our world when prices fall - interest rates rise.
This morning's release of the April Existing Home Sales figure was almost completely overshadowed by investor nervousness surrounding today's 5-year Treasury note auction and growing anxiety about tomorrow's bigger hurdle of $26 billion in the form of 7-year notes The National Association of Realtors said purchases increased 2.9% on an annualized basis last month. Distressed sales accounted for 45% of all transactions. The inventory of homes for sale increased 8.7% as more homes were listed during the popular spring selling season.
In a related, but separate report the Mortgage Bankers of America said their seasonally adjusted index of loan applications to purchase or refinance a home fell by 14% during the week ended May 22nd. The refinance component of the index fell by 14% while the purchase component gained 1.0%.
Tuesday, May 26, 2009
Tuesday, May 26, 2009
Trading action in the mortgage market will likely be dominated by the massive Treasury auctions scheduled for today, Wednesday and Thursday. Uncle Sam will be looking to borrow $40 billion in the form of 2-year notes today, $35 billion tomorrow and $26 billion of 7-year notes on Thursday.
There are those that argue that the yields on these securities are high enough (last touched during November 2008) that demand will be strong - and further yield increases won't be necessary to attract the required capital. If so, this week's record-tying Treasury auction will likely have little, if any noticeable impact on the current level of mortgage interest rates.
There are other analysts that strongly believe yields will move higher as global investors begin to fret that the sovereign creditworthiness of the United States will be severely threatened as the government makes an attempt to resolve the credit crisis by taking on mountains of additional debt. It will be months yet before the results of the government's massive borrowing and spending strategy to revive the economy will be clearly known.
Many observers believe global investors will choose to take a "worst-case" approach and demand higher yields for their money now as they anticipate the government's effort to borrow the nation into prosperity will prove a dismal failure. If this perspective proves to be broadly represented in the global investment community -- look for rising yield requirements at this week's Treasury auction to drag mortgage interest rates higher as well.
Most feel the yield on the government's 2-year note is unlikely to fall much - but the 5- and 7-year notes are at levels that will likely draw significant and aggressive bidding from both domestic and foreign investors. If those feelings prove accurate, mortgage interest rates stand a good possibility of finishing the week fractionally lower than where they began.
There are those that argue that the yields on these securities are high enough (last touched during November 2008) that demand will be strong - and further yield increases won't be necessary to attract the required capital. If so, this week's record-tying Treasury auction will likely have little, if any noticeable impact on the current level of mortgage interest rates.
There are other analysts that strongly believe yields will move higher as global investors begin to fret that the sovereign creditworthiness of the United States will be severely threatened as the government makes an attempt to resolve the credit crisis by taking on mountains of additional debt. It will be months yet before the results of the government's massive borrowing and spending strategy to revive the economy will be clearly known.
Many observers believe global investors will choose to take a "worst-case" approach and demand higher yields for their money now as they anticipate the government's effort to borrow the nation into prosperity will prove a dismal failure. If this perspective proves to be broadly represented in the global investment community -- look for rising yield requirements at this week's Treasury auction to drag mortgage interest rates higher as well.
Most feel the yield on the government's 2-year note is unlikely to fall much - but the 5- and 7-year notes are at levels that will likely draw significant and aggressive bidding from both domestic and foreign investors. If those feelings prove accurate, mortgage interest rates stand a good possibility of finishing the week fractionally lower than where they began.
Friday, May 15, 2009
Friday, May 15, 2009
The few traders at their desks today made a feeble attempt at ramping up activity levels following this morning’s release of the April Industrial Production and Capacity Utilization report – but it didn’t take long before they gave that effort up -- and returned to their Sudoku puzzles (the easy ones).
Government data on national industrial output suggested the economy’s rate of deterioration was slowing, a perspective that tends to dim investors appetites for low-risk, low-return investments like mortgage-backed securities. Industrial production fell 0.5% in April, dropping for the sixth consecutive month but at a more modest pace than in recent months. The amount of industrial capacity in use dropped to a record-low 69.1%.
The “so what” factor behind all this mumbo-jumbo is that immediately after the data hit the wires -- media sources and some traders tried to talk up this news as a sign the bottom in the manufacturing sector is at hand. These tambourine shakers went on to suggest activity levels in the manufacturing sector will quickly swing into positive territory as recent massive inventory draw-downs must be rebuilt. The knee-jerk selling pressure in the mortgage market quickly abated as calmer, cooler heads pointed out the trend for industrial production is still pointing sharply downward.
In other news of the day consumer prices were unchanged in April, as expected, but the core rate of inflation (a value that excludes the more volatile food and energy components) was up a stronger than expected 0.3%. Most analysts had anticipated core inflation would creep higher by 0.1%.
Both of today’s reports were slightly out-of-line with market expectations -- just enough to cause investors to choose to lackadaisically nudge mortgage rate sheet prices a fraction lower.
Looking ahead to next week the economic calendar is virtually void of any meaningful data. Tuesday’s housing starts and building permit figures for April is the only major report scheduled for release. Expect trading action in the stock markets to have a strong impact on the trend trajectory of mortgage interest rates over the course of the coming five trading sessions. Falling stock prices will tend to support steady to fractionally lower mortgage interest rates while rising stock prices will likely push mortgage interest rate incrementally higher. The mortgage market will close early at 2:00 p.m. ET on Friday, May 22nd and will remain closed on Monday, May 25th for the Memorial Day holiday.
Government data on national industrial output suggested the economy’s rate of deterioration was slowing, a perspective that tends to dim investors appetites for low-risk, low-return investments like mortgage-backed securities. Industrial production fell 0.5% in April, dropping for the sixth consecutive month but at a more modest pace than in recent months. The amount of industrial capacity in use dropped to a record-low 69.1%.
The “so what” factor behind all this mumbo-jumbo is that immediately after the data hit the wires -- media sources and some traders tried to talk up this news as a sign the bottom in the manufacturing sector is at hand. These tambourine shakers went on to suggest activity levels in the manufacturing sector will quickly swing into positive territory as recent massive inventory draw-downs must be rebuilt. The knee-jerk selling pressure in the mortgage market quickly abated as calmer, cooler heads pointed out the trend for industrial production is still pointing sharply downward.
In other news of the day consumer prices were unchanged in April, as expected, but the core rate of inflation (a value that excludes the more volatile food and energy components) was up a stronger than expected 0.3%. Most analysts had anticipated core inflation would creep higher by 0.1%.
Both of today’s reports were slightly out-of-line with market expectations -- just enough to cause investors to choose to lackadaisically nudge mortgage rate sheet prices a fraction lower.
Looking ahead to next week the economic calendar is virtually void of any meaningful data. Tuesday’s housing starts and building permit figures for April is the only major report scheduled for release. Expect trading action in the stock markets to have a strong impact on the trend trajectory of mortgage interest rates over the course of the coming five trading sessions. Falling stock prices will tend to support steady to fractionally lower mortgage interest rates while rising stock prices will likely push mortgage interest rate incrementally higher. The mortgage market will close early at 2:00 p.m. ET on Friday, May 22nd and will remain closed on Monday, May 25th for the Memorial Day holiday.
Thursday, May 14, 2009
Wednesday, May 14, 2009
Trading activity in the mortgage market is slow in this morning's early going. Stronger-than-expected readings on prices paid to factories, farmers, and other producers together with a surge in the number of workers seeking jobless benefits during the week ended May 9th did not cause much of a stir among mortgage investors.
The Labor Department reported a 0.3% increase in the headline April producer price index and a 0.2% jump in the core rate of the index (a value that excludes the more volatile food and energy components).
In a separate report the Labor Department said the number of workers filing first-time claims for unemployment benefits climbed by 32,000 last week. A Labor Department spokesman said, ". a good part of the increase is due to automotive states and claims" related to the bankruptcy of Chrysler. The four-week moving average of claims, considered to be a better gauge of underlying jobless trends because it smoothes out week-to-week volatility, rose by 6,000 - the first such increase in four weeks.
These two reports essentially cancelled each other out with respect to their impact on the mortgage market. Rising price pressure at the producer level (a generally mortgage market unfriendly event) was offset by notable jump in unemployment claims (a generally mortgage market friendly event).
The Fed continues to be a formidable presence in the mortgage market - aggressively buying mortgage-backed securities and Treasury debt obligations in support of steady to fractionally lower mortgage interest rates. The Fed has set a goal to buy up to $1.25 trillion of agency-eligible mortgage-backed securities, $300 billion of Treasuries and $200 billion of the agency debt instruments of Fannie Mae and Freddie Mac. As of last Friday, the Fed's direct purchase of mortgage-backed securities and agency debt totaled $429.7 billion. The central bank has spent $72 billion in direct purchases of Treasury debt obligations.
As long as this financial firepower is sustained - mortgage interest rates are unlikely to move sharply higher from current levels. That is not to say mortgage interest rates won't move higher - it simply means the slope of increase will likely remain, at worst, nothing but a gentle upward gradient for several more months.
The Labor Department reported a 0.3% increase in the headline April producer price index and a 0.2% jump in the core rate of the index (a value that excludes the more volatile food and energy components).
In a separate report the Labor Department said the number of workers filing first-time claims for unemployment benefits climbed by 32,000 last week. A Labor Department spokesman said, ". a good part of the increase is due to automotive states and claims" related to the bankruptcy of Chrysler. The four-week moving average of claims, considered to be a better gauge of underlying jobless trends because it smoothes out week-to-week volatility, rose by 6,000 - the first such increase in four weeks.
These two reports essentially cancelled each other out with respect to their impact on the mortgage market. Rising price pressure at the producer level (a generally mortgage market unfriendly event) was offset by notable jump in unemployment claims (a generally mortgage market friendly event).
The Fed continues to be a formidable presence in the mortgage market - aggressively buying mortgage-backed securities and Treasury debt obligations in support of steady to fractionally lower mortgage interest rates. The Fed has set a goal to buy up to $1.25 trillion of agency-eligible mortgage-backed securities, $300 billion of Treasuries and $200 billion of the agency debt instruments of Fannie Mae and Freddie Mac. As of last Friday, the Fed's direct purchase of mortgage-backed securities and agency debt totaled $429.7 billion. The central bank has spent $72 billion in direct purchases of Treasury debt obligations.
As long as this financial firepower is sustained - mortgage interest rates are unlikely to move sharply higher from current levels. That is not to say mortgage interest rates won't move higher - it simply means the slope of increase will likely remain, at worst, nothing but a gentle upward gradient for several more months.
Wednesday, May 13, 2009
Wednesday, May 13, 2009
Mortgage interest rates were nudged fractionally lower by weaker-than-expected retail sales figures for April.
Retail sales fell 0.4% in April, baffling the significant number of economist who had been expecting April retail sales to make a much better showing. The 0.4% drop in the headline number followed a revised 1.3% drop in March that was also weaker-than-expected. Stripping out the volatile auto sales component did not help the numbers look any better. Even reduced to this base level, retail sales fell 0.5% last month. The "so what" factor attached to this morning's April retail sales report is that all investors were given a big reminder that the economy is staggering along a rocky, uneven road to recovery.
In a separate report the Mortgage Bankers of America said application demand slipped to its lowest level since mid-March during the week-ended April 9th, driven by a drop in requests to refinance loans. The MBA's overall application index dropped by 8.6% compared to the previous week level. Refinance applications fell 11.2% -- while the component of the index that measures purchase loan requests posted a modest 0.5% improvement.
Last but certainly not lest, selling pressure in the stock market is contributing to solid improvements in the mortgage market in today's early going. An increasing number of analysts are warning the rally in stock prices that began in early March is overdue for a correction to the downside. Should these forecasts prove accurate; a meaningful sell-off in the stock markets will almost certainly support the prospects for steady to perhaps fractionally lower mortgage interest rates.
Retail sales fell 0.4% in April, baffling the significant number of economist who had been expecting April retail sales to make a much better showing. The 0.4% drop in the headline number followed a revised 1.3% drop in March that was also weaker-than-expected. Stripping out the volatile auto sales component did not help the numbers look any better. Even reduced to this base level, retail sales fell 0.5% last month. The "so what" factor attached to this morning's April retail sales report is that all investors were given a big reminder that the economy is staggering along a rocky, uneven road to recovery.
In a separate report the Mortgage Bankers of America said application demand slipped to its lowest level since mid-March during the week-ended April 9th, driven by a drop in requests to refinance loans. The MBA's overall application index dropped by 8.6% compared to the previous week level. Refinance applications fell 11.2% -- while the component of the index that measures purchase loan requests posted a modest 0.5% improvement.
Last but certainly not lest, selling pressure in the stock market is contributing to solid improvements in the mortgage market in today's early going. An increasing number of analysts are warning the rally in stock prices that began in early March is overdue for a correction to the downside. Should these forecasts prove accurate; a meaningful sell-off in the stock markets will almost certainly support the prospects for steady to perhaps fractionally lower mortgage interest rates.
Monday, May 11, 2009
Monday, May 11, 2009
The Fed is definitely making their presence felt in the Treasury market this morning.
The Fed is actively buying Treasury obligations maturing in 15- to 30-years. Today's Fed operation is part of its ongoing $300 billion plan to purchase government debt to help keep borrowing cost artificially low, giving the economy the opportunity to fight its way out of a major recession. That is good news. The even better news is that Mr. Bernanke has plans for an encore performance in the Treasury market tomorrow. For the time begin, expect these Fed buying sprees to limit any significant upside pressure on mortgage interest rates.
Selling pressure in the stock market is contributing to solid improvements in the mortgage market in today's early going. An increasing number of analysts are warning the rally in stock prices that began in early March is overdue for a correction to the downside. Should these forecasts prove accurate; a meaningful sell-off in the stock markets will almost certainly support the prospects for steady to perhaps fractionally lower mortgage interest rates.
The Fed is actively buying Treasury obligations maturing in 15- to 30-years. Today's Fed operation is part of its ongoing $300 billion plan to purchase government debt to help keep borrowing cost artificially low, giving the economy the opportunity to fight its way out of a major recession. That is good news. The even better news is that Mr. Bernanke has plans for an encore performance in the Treasury market tomorrow. For the time begin, expect these Fed buying sprees to limit any significant upside pressure on mortgage interest rates.
Selling pressure in the stock market is contributing to solid improvements in the mortgage market in today's early going. An increasing number of analysts are warning the rally in stock prices that began in early March is overdue for a correction to the downside. Should these forecasts prove accurate; a meaningful sell-off in the stock markets will almost certainly support the prospects for steady to perhaps fractionally lower mortgage interest rates.
Thursday, May 7, 2009
Thursday, May 7, 2009
Mortgage investors will no doubt approach the next two days as carefully. There is nothing like a major Treasury auction, the release of a much anticipated government mandated bank stress test, and an upcoming major macro-economic report to make mortgage investors antsy.
Uncle Sam is in the credit markets once again this morning looking to borrow $14 billion in the form of 30-year bonds. This will be the last leg of the Treasury Department's three-part quarterly refunding. A number of analysts are concerned that the current yield of 4.17% is not high enough to attract significant buying interest from auction participants. If these concerns are proven to be well founded -- the bid price for this offering will fall - pushing the yield on the 30-year bond higher. That's a scenario that will almost certainly result in higher mortgage interest rates. While the yield on the 30-year bond may indeed be pushed higher -- as investors chose to remain guarded in front of this afternoon's release of the government's bank stress test results and tomorrow's big April nonfarm payroll data - the 30-year bond yield won't climb by much and the overall impact on the current level of mortgage interest rates related to these events will be minimal.
The results of the government's "stress test" for 19 of the top banks in the country will officially be made public at 5:00 p.m. ET today. Treasury Secretary Geithner has reassured investors that none of the 19 banks under examination are at risk of insolvency. Some banks in the group may need injections of additional capital to meet the new government standards. Should the total amount of capital required to bring these banks "up-to-snuff" fall below $300 billion - most analysts believe investors will breathe a big sigh of relief -- and the rally in the stock markets will continue unabated. I'm not so sure - but should this scenario "pan-out" like most predict it will - this event will tend to put some modest additional upward pressure on mortgage interest rates.
The unexpected drop in the number of people filing first-time claims for unemployment benefits during the past week was a bit unsettling for mortgage investors. The Labor Department reported weekly jobless claims for the period ended May 2nd fell by 34,000 - equaling a mark last experienced in January. The four-week moving average of jobless claims, a better gauge of underlying labor trends because it irons out week-to-week volatility, fell for the fourth week in a row. The survey period for this week's jobless claims data falls outside of the survey period for tomorrow's much more important April nonfarm payroll report. Nonetheless, a number of mortgage investors are marking their headline forecast for nonfarm payrolls down to a loss of 600,000 to 590,000 jobs from their earlier estimates for April job losses of 620,000 or more. Only a handful of analysts have elected to mark down their expectations for a national jobless rate of 8.9% to be reported tomorrow.
Uncle Sam is in the credit markets once again this morning looking to borrow $14 billion in the form of 30-year bonds. This will be the last leg of the Treasury Department's three-part quarterly refunding. A number of analysts are concerned that the current yield of 4.17% is not high enough to attract significant buying interest from auction participants. If these concerns are proven to be well founded -- the bid price for this offering will fall - pushing the yield on the 30-year bond higher. That's a scenario that will almost certainly result in higher mortgage interest rates. While the yield on the 30-year bond may indeed be pushed higher -- as investors chose to remain guarded in front of this afternoon's release of the government's bank stress test results and tomorrow's big April nonfarm payroll data - the 30-year bond yield won't climb by much and the overall impact on the current level of mortgage interest rates related to these events will be minimal.
The results of the government's "stress test" for 19 of the top banks in the country will officially be made public at 5:00 p.m. ET today. Treasury Secretary Geithner has reassured investors that none of the 19 banks under examination are at risk of insolvency. Some banks in the group may need injections of additional capital to meet the new government standards. Should the total amount of capital required to bring these banks "up-to-snuff" fall below $300 billion - most analysts believe investors will breathe a big sigh of relief -- and the rally in the stock markets will continue unabated. I'm not so sure - but should this scenario "pan-out" like most predict it will - this event will tend to put some modest additional upward pressure on mortgage interest rates.
The unexpected drop in the number of people filing first-time claims for unemployment benefits during the past week was a bit unsettling for mortgage investors. The Labor Department reported weekly jobless claims for the period ended May 2nd fell by 34,000 - equaling a mark last experienced in January. The four-week moving average of jobless claims, a better gauge of underlying labor trends because it irons out week-to-week volatility, fell for the fourth week in a row. The survey period for this week's jobless claims data falls outside of the survey period for tomorrow's much more important April nonfarm payroll report. Nonetheless, a number of mortgage investors are marking their headline forecast for nonfarm payrolls down to a loss of 600,000 to 590,000 jobs from their earlier estimates for April job losses of 620,000 or more. Only a handful of analysts have elected to mark down their expectations for a national jobless rate of 8.9% to be reported tomorrow.
Wednesday, May 6, 2009
Tuesday, May 6, 2009
Uncle Sam is splashing around in the credit market this morning looking to borrow $22 billion in the form of 10-year notes. He'll wrap-up things up at 1:00 p.m. ET.
As expected, yesterday's three-year note auction went off without a hitch and generated solid investor demand. Keep you fingers crossed that today's outsized 10-year note auction goes as well. The Treasury's 10-year notes are currently carrying a yield better than 3.0% -- which should make them enticing to domestic and foreign investors alike. A well bid 10-year note auction will tend to support steady to perhaps fractionally lower interest rates while weak auction results will likely put some upward pressure on mortgage rates. Today's 10-year note offering will likely produce unremarkable bid results. If so, this event will exert little, if any meaningful influence on the direction of mortgage interest rates today.
There was nothing in the way of important economic news from the government on today's calendar - so the private ADP payroll survey and the Challenger, Gray and Christmas survey of layoff announcements garnered a little more attention from mortgage investors than normal. The ADP National Employment Report showed a 491,000 drop in private payrolls in March, a far less severe decline than the 650,000 job loss in the private sector most analysts had been expecting to see. The Challenger report showed planned job cuts totaled 132,590 in April, significantly less that the 150,411 March number. Both of these private reports are known to vary significantly from the labor sector numbers the government reports. Even so, the marked improvement in the private April data has some mortgage investors nervous that the nonfarm payroll report from the Labor Department on Friday may not be nearly as bleak as most analysts currently expect.
Most market participants, economists and analysts in general are expecting the government's April Nonfarm Payroll report will show the nation lost 620,000 jobs (from both the private and government sectors) last month - a condition that has caused the unemployment rate to surge to 8.9% from the March level of 8.4%. Actual numbers that closely approximate this consensus estimate are already priced into the mortgage market and will therefore create little if any impact on the current level of mortgage interest rates.
With respect to the mortgage market, the risk on Friday is that the headline payroll number posts a job loss of 600,000 or less and/or the national jobless rate post a reading of 8.7% or less. Actual numbers that fall meaningfully below current expectations will probably unsettle a rather large number of mortgage investors. As you well know, spooked investors tend to sell first -- and ask questions later. If this scenario were to develop, even aggressive buying by the Fed will not likely be enough to keep mortgage interest rates from moving uncomfortably higher from current levels.
As expected, yesterday's three-year note auction went off without a hitch and generated solid investor demand. Keep you fingers crossed that today's outsized 10-year note auction goes as well. The Treasury's 10-year notes are currently carrying a yield better than 3.0% -- which should make them enticing to domestic and foreign investors alike. A well bid 10-year note auction will tend to support steady to perhaps fractionally lower interest rates while weak auction results will likely put some upward pressure on mortgage rates. Today's 10-year note offering will likely produce unremarkable bid results. If so, this event will exert little, if any meaningful influence on the direction of mortgage interest rates today.
There was nothing in the way of important economic news from the government on today's calendar - so the private ADP payroll survey and the Challenger, Gray and Christmas survey of layoff announcements garnered a little more attention from mortgage investors than normal. The ADP National Employment Report showed a 491,000 drop in private payrolls in March, a far less severe decline than the 650,000 job loss in the private sector most analysts had been expecting to see. The Challenger report showed planned job cuts totaled 132,590 in April, significantly less that the 150,411 March number. Both of these private reports are known to vary significantly from the labor sector numbers the government reports. Even so, the marked improvement in the private April data has some mortgage investors nervous that the nonfarm payroll report from the Labor Department on Friday may not be nearly as bleak as most analysts currently expect.
Most market participants, economists and analysts in general are expecting the government's April Nonfarm Payroll report will show the nation lost 620,000 jobs (from both the private and government sectors) last month - a condition that has caused the unemployment rate to surge to 8.9% from the March level of 8.4%. Actual numbers that closely approximate this consensus estimate are already priced into the mortgage market and will therefore create little if any impact on the current level of mortgage interest rates.
With respect to the mortgage market, the risk on Friday is that the headline payroll number posts a job loss of 600,000 or less and/or the national jobless rate post a reading of 8.7% or less. Actual numbers that fall meaningfully below current expectations will probably unsettle a rather large number of mortgage investors. As you well know, spooked investors tend to sell first -- and ask questions later. If this scenario were to develop, even aggressive buying by the Fed will not likely be enough to keep mortgage interest rates from moving uncomfortably higher from current levels.
Tuesday, May 5, 2009
CINCO de MAYO, 2009
Economic activity will turn a positive corner later in the year as long as the financial sector continues to mend. The improvement will come even as unemployment remains high. This was part of the fairly positive assessment of economic conditions Fed Chairman Bernanke provided to the Joint Economic Committee of Congress earlier this morning. Bernanke said central bankers see reason to believe the housing market may be approaching the bottom of its three-year slide, driven in part by tentative signs of a rebound in consumer spending, the primary driving force behind economic growth. He went on to say that even after the recovery begins, "the rate of growth of real economic activity is likely to remain below its longer-run potential for a while."
The story behind all this mumbo-jumbo from a mortgage market perspective is that improved economic activity levels tend to lead to an increased demand for capital from consumers and businesses -- which in-turn ultimately leads to higher interest rates. I realize there are those that argue higher mortgage interest rates are unlikely if for no other reason than the Fed has been an aggressive buyer all year.
Granted, at one time this year the Fed had roughly $1.25 trillion dollars in their back pocket to support steady to lower mortgage interest rates through the direct purchase of mortgage-backed securities. As of last Thursday, the Fed has spent a $404 billion of their available capital. The good news is that experts agree these purchases by the Fed have been instrumental in driving agency- eligible mortgage interest rates to historical lows. The bad news is that the Fed is running a "burn-rate" of roughly $100 billion per month in direct purchases of mortgage-backed securities.
The "so what" factor here is definitely worth noting. Once the Fed passes the half-way point (roughly $612 billion in direct mortgage-backed securities purchases) their ability to hold mortgage interest rates near historical lows will begin to fade at an accelerating rate. The probability the Fed will choose to ramp up the amount of capital currently authorized is small. As we move into the second half of the year it is reasonable to expect conforming mortgage interest rates to begin a slow, but progressive march to 6.0% levels and above.
The story behind all this mumbo-jumbo from a mortgage market perspective is that improved economic activity levels tend to lead to an increased demand for capital from consumers and businesses -- which in-turn ultimately leads to higher interest rates. I realize there are those that argue higher mortgage interest rates are unlikely if for no other reason than the Fed has been an aggressive buyer all year.
Granted, at one time this year the Fed had roughly $1.25 trillion dollars in their back pocket to support steady to lower mortgage interest rates through the direct purchase of mortgage-backed securities. As of last Thursday, the Fed has spent a $404 billion of their available capital. The good news is that experts agree these purchases by the Fed have been instrumental in driving agency- eligible mortgage interest rates to historical lows. The bad news is that the Fed is running a "burn-rate" of roughly $100 billion per month in direct purchases of mortgage-backed securities.
The "so what" factor here is definitely worth noting. Once the Fed passes the half-way point (roughly $612 billion in direct mortgage-backed securities purchases) their ability to hold mortgage interest rates near historical lows will begin to fade at an accelerating rate. The probability the Fed will choose to ramp up the amount of capital currently authorized is small. As we move into the second half of the year it is reasonable to expect conforming mortgage interest rates to begin a slow, but progressive march to 6.0% levels and above.
Monday, May 4, 2009
Monday, May 4, 2009
The mortgage market will be under siege this week with three Treasury auctions, the release of the government's bank stress test and the latest numbers from the employment sector on Friday.
The Treasury will auction $35 billion of three-year notes on Tuesday, $22 billion of 10-year notes on Wednesday and $14 billion of 30-year bonds on Thursday. The yield on all three securities is within shouting distance of pre-Thanksgiving levels - which should make them very attractive to domestic and foreign investors alike. If so, Uncle Sam's three-part Treasury auction this week should leave mortgage interest rates relatively unscathed.
The government's release of the stress test for banks late on Thursday will be, in my opinion, the "wild card" of the week. Passing grades for the majority of the 19 banks involved will likely support a continued rally in the stock market at the expense of fractionally higher mortgage interest rates. On the other hand, if the stress test reveals the majority of banks are more fragile than expected look for stocks to swoon as investors scramble to move capital into the relative safe haven of Treasury obligations and mortgage-backed securities.
Friday's 8:30 a.m. ET release of the April nonfarm payroll report may prove to be a non-event with respect to its impact on the mortgage market. Mortgage investors have already priced-in expectations for a 620,000 job loss and a 0.4% gain in the national jobless rate to 8.9% from the March level of 8.5%. Employment numbers that happen to be worse than forecast -- will not likely cause much of a stir in the mortgage market. The same cannot be said for numbers that are not as bleak as forecast. In the unlikely case the headline nonfarm payroll report shows the economy shed 600,000 or fewer jobs and/or the national jobless rate posts a reading of 8.8% or less look for mortgage investors to register their surprise by pushing mortgage interest rates higher.
The Treasury will auction $35 billion of three-year notes on Tuesday, $22 billion of 10-year notes on Wednesday and $14 billion of 30-year bonds on Thursday. The yield on all three securities is within shouting distance of pre-Thanksgiving levels - which should make them very attractive to domestic and foreign investors alike. If so, Uncle Sam's three-part Treasury auction this week should leave mortgage interest rates relatively unscathed.
The government's release of the stress test for banks late on Thursday will be, in my opinion, the "wild card" of the week. Passing grades for the majority of the 19 banks involved will likely support a continued rally in the stock market at the expense of fractionally higher mortgage interest rates. On the other hand, if the stress test reveals the majority of banks are more fragile than expected look for stocks to swoon as investors scramble to move capital into the relative safe haven of Treasury obligations and mortgage-backed securities.
Friday's 8:30 a.m. ET release of the April nonfarm payroll report may prove to be a non-event with respect to its impact on the mortgage market. Mortgage investors have already priced-in expectations for a 620,000 job loss and a 0.4% gain in the national jobless rate to 8.9% from the March level of 8.5%. Employment numbers that happen to be worse than forecast -- will not likely cause much of a stir in the mortgage market. The same cannot be said for numbers that are not as bleak as forecast. In the unlikely case the headline nonfarm payroll report shows the economy shed 600,000 or fewer jobs and/or the national jobless rate posts a reading of 8.8% or less look for mortgage investors to register their surprise by pushing mortgage interest rates higher.
Friday, May 1, 2009
Friday, May 1, 2009
Supply is a big issue today as investors are busy trying to make room in their portfolios for next week's record setting $71 billion borrowing spree by Uncle Sam. The government will be in credit markets conducting a three-part auction beginning on Tuesday with a $35 billion 3-year note auction, followed by Wednesday's $22 billion 10-year note auction and concluding with Thursday's $14 billion 30-year bond offering. The yield on all three securities has risen rather sharply over the past week or so - which may result in investor appetite proving to be stronger than many now expect. If so, next week's three-part Treasury auction may ultimately support steady to perhaps fractionally lower mortgage interest rates.
Next week's economic calendar will be relatively light through the first four days of the week - but will end with a bang when Friday's April Nonfarm Payroll figures are released at 8:30 a.m. ET. Most mortgage investors have already priced in expectations of a headline payroll figure indicating the economy lost 630,000 jobs last month, while the national jobless rate dropped to 8.9% from the March level of 8.5%.
With so many expecting such dreary news from the labor sector the risk (in terms of mortgage interest rates) is that the nonfarm payroll data proves to be stronger-than-expected. I'm not saying such an outcome is probable - I'm just saying it should be considered possible. The "so what" factor here goes like this -- Mortgage investors live in the future - not the present. The story from the labor sector doesn't have to improve much to induce investors to start incrementally ratcheting up mortgage interest rates in anticipation of stronger numbers to come.
Next week's economic calendar will be relatively light through the first four days of the week - but will end with a bang when Friday's April Nonfarm Payroll figures are released at 8:30 a.m. ET. Most mortgage investors have already priced in expectations of a headline payroll figure indicating the economy lost 630,000 jobs last month, while the national jobless rate dropped to 8.9% from the March level of 8.5%.
With so many expecting such dreary news from the labor sector the risk (in terms of mortgage interest rates) is that the nonfarm payroll data proves to be stronger-than-expected. I'm not saying such an outcome is probable - I'm just saying it should be considered possible. The "so what" factor here goes like this -- Mortgage investors live in the future - not the present. The story from the labor sector doesn't have to improve much to induce investors to start incrementally ratcheting up mortgage interest rates in anticipation of stronger numbers to come.
Subscribe to:
Posts (Atom)
