It appears the mortgage market is poised to drift through the last trading day of October taking directional cues from trading activity in the stock markets. Lower stock prices will tend to support steady to fractionally lower mortgage interest rates. In the off-chance stock prices rally - look for mortgage investors to push rate sheet prices lower.
This morning's report of September Personal Income and Spending fell almost exactly on values most economists had projected - rendering the whole thing essentially toothless with respect to its influence on the trend trajectory of mortgage interest rates.
Looking ahead to next week the release of the Fed's post-meeting statement on Wednesday afternoon and the October nonfarm payroll numbers on Friday morning will dominate the macro-economic calendar. There is a chance the Fed will tweak the language in their statement to open the door for a potential short-term rate hike somewhere down the road.
Most believe economic conditions are still too fragile for the Fed to run the risk of upsetting the credit market's apple cart. If the consensus view proves accurate, the Fed meeting will come and go without exerting much, if any direct influence on the direction of mortgage interest rates. On the other hand, if the Fed chooses to do a little wordsmithing - and investors interpret the change to indicate the Fed is considering moving away from their accommodative monetary policy stance -- expect market participants to register their displeasure by pushing interest rates higher and prices lower.
The only threat of higher mortgage interest rates in Friday's nonfarm payroll data will be if the numbers prove to be significantly stronger than market participants now anticipate. In my judgment it will take a headline payroll number that shows job losses of 150,000 or less and/or a national jobless rate of 9.7% or lower and/or an average work week of 33.0 hours or more. The likelihood that one or any combination of these values actually appears in the Labor Department report is very small.
Friday, October 30, 2009
Thursday, October 29, 2009
Mortgage investors suffered a major "Maalox Moment" this morning when the government reported the economy grew at a significantly faster-pace than expected in the July through September period. The Commerce Department said their first estimate of Gross Domestic Product, a statistical measure of the value of all the goods and service produced in the country, showed a gain of 3.5%. The economic growth in the third-quarter of 2009 was the fastest since the third-quarter of 2007. The gain in third-quarter GDP was generally broad-based, with solid gains in consumer spending, exports and investment in home-construction.
It seems for the time being mortgage investors are simply glossing over the fact that the big gains in consumer spending and residential investment were largely driven by limited term government stimulus programs like "cash-for-clunkers" and the first-time homebuyer tax credit.
The latest gain in GDP growth stands in stark contrast to the 12 month period that ended in June 2009, a period when the economy turned in its worst performance in 70 years. The four consecutive quarterly GDP declines through the Q2 2009 marks the longest stretch of negative national economic growth since quarterly records began in 1947.
The question that bond traders and stock investors will be attempting to answer now has to do with the sustainability of economic growth. Was the outstanding third-quarter performance a "one-trick-pony," created by large amounts of government support - or was it another piece of evidence suggesting the Great Recession is coming to a close?
Some analysts point to the fact that if we strip out auto sales, production, and inventories, the economy grew at 1.9% last quarter - a very lethargic rate of growth at best. While I agree with the idea that modest growth is better than no growth at all - the likelihood of sustainable and meaningful economic growth is, in my judgment, still very much dependant on job growth. The consumer is the engine that drives more than 70% of our domestic economic activity -- and until the employment picture improves dramatically - the probabilities are high that the national economic growth prospects will remain anemic.
Speaking of employment -- a separate report from the Labor Department this morning showed the number of workers filing new claims for jobless benefits dipped by 1,000 during the week ended October 24th. The still-elevated numbers of continuing claims (a measure of those drawing benefits after the initial week) and those claiming extended benefits and support from the Emergency Unemployment Compensation program paints nothing but a very dismal picture of current conditions in the labor market.
Uncle Sam is conducting the last of this week's scheduled four-part Treasury auctions. On the block today is a $31 billion stack of 7-year notes. Since March of this year the Fed has been a relatively strong buyer of these securities. That is the good news. The bad news is their $300 billion dollar direct purchase program draws to a close today. The Fed as already spent $298.063 billion of their total allocation -- and they will drop the last of it on Treasury securities maturing in the next 4- to 7-years before the end of the day.
Keep your fingers crossed that the bidding at today's auction remains aggressive without the support of the Fed direct purchases. The more aggressive the bidding is for the 7-year notes -- the better the prospects for steady mortgage interest rates. If today's 7-year note sale is a bust - look for mortgage interest rates to edge higher before the end of the day.
It seems for the time being mortgage investors are simply glossing over the fact that the big gains in consumer spending and residential investment were largely driven by limited term government stimulus programs like "cash-for-clunkers" and the first-time homebuyer tax credit.
The latest gain in GDP growth stands in stark contrast to the 12 month period that ended in June 2009, a period when the economy turned in its worst performance in 70 years. The four consecutive quarterly GDP declines through the Q2 2009 marks the longest stretch of negative national economic growth since quarterly records began in 1947.
The question that bond traders and stock investors will be attempting to answer now has to do with the sustainability of economic growth. Was the outstanding third-quarter performance a "one-trick-pony," created by large amounts of government support - or was it another piece of evidence suggesting the Great Recession is coming to a close?
Some analysts point to the fact that if we strip out auto sales, production, and inventories, the economy grew at 1.9% last quarter - a very lethargic rate of growth at best. While I agree with the idea that modest growth is better than no growth at all - the likelihood of sustainable and meaningful economic growth is, in my judgment, still very much dependant on job growth. The consumer is the engine that drives more than 70% of our domestic economic activity -- and until the employment picture improves dramatically - the probabilities are high that the national economic growth prospects will remain anemic.
Speaking of employment -- a separate report from the Labor Department this morning showed the number of workers filing new claims for jobless benefits dipped by 1,000 during the week ended October 24th. The still-elevated numbers of continuing claims (a measure of those drawing benefits after the initial week) and those claiming extended benefits and support from the Emergency Unemployment Compensation program paints nothing but a very dismal picture of current conditions in the labor market.
Uncle Sam is conducting the last of this week's scheduled four-part Treasury auctions. On the block today is a $31 billion stack of 7-year notes. Since March of this year the Fed has been a relatively strong buyer of these securities. That is the good news. The bad news is their $300 billion dollar direct purchase program draws to a close today. The Fed as already spent $298.063 billion of their total allocation -- and they will drop the last of it on Treasury securities maturing in the next 4- to 7-years before the end of the day.
Keep your fingers crossed that the bidding at today's auction remains aggressive without the support of the Fed direct purchases. The more aggressive the bidding is for the 7-year notes -- the better the prospects for steady mortgage interest rates. If today's 7-year note sale is a bust - look for mortgage interest rates to edge higher before the end of the day.
Wednesday, October 28, 2009
Wednesday, October 28, 2009
The mortgage market got off to a friendly start this morning as lower-than-expected September new home sales figures offset encouraging data from the manufacturing sector that came in the form of surprisingly solid September Durable Goods numbers.
In a separate report the Mortgage Bankers of America reported their index of seasonally adjusted mortgage applications (a value that includes requests for both purchase and refinance loans) slipped 12.3% lower during the week ended October 23rd. Purchase applications were down 5.2% and refinance applications declined 16.2%. During the reporting period the average 30-year fixed-rate mortgage was 5.04%, down three basis-points from the prior week -- and down 122 basis-points from the year ago mark.
The mixed signal from the economy was enough to induce a round of selling in the stock markets. As capital leaves riskier asset classes like stocks - it is typically looking for a safe place in which to hang-out - and that is a condition that tends to make government debt obligations and mortgage-backed securities shine as an attractive sanctuary for these money flows. The more money that flows into the credit markets - and particularly into mortgage-backed securities - the more supportive it becomes of the prospects for steady to perhaps fractionally lower mortgage interest rates.
The timing of ramped-up selling pressure in the equity markets could not have come at a better time from a credit market perspective. Uncle Sam is conducting an auction today looking to borrow $41 billion in the form of 5-year notes. The more aggressive the bidding becomes for these securities -- the better the prospects for steady to perhaps fractionally lower mortgage interest rates. The first two legs of this week's Treasury auctions - Monday's $7 billion of 5-year inflation indexed securities and yesterday's $44 billion of 2-year notes - drew slightly better-than-expected demand. If today's 5-year note sale keeps the string alive this event's impact on the trend trajectory of mortgage interest rates will likely be very limited. In the off-chance today's 5-year note sale is a bust - look for mortgage interest rates to edge higher before the end of the day.
In a separate report the Mortgage Bankers of America reported their index of seasonally adjusted mortgage applications (a value that includes requests for both purchase and refinance loans) slipped 12.3% lower during the week ended October 23rd. Purchase applications were down 5.2% and refinance applications declined 16.2%. During the reporting period the average 30-year fixed-rate mortgage was 5.04%, down three basis-points from the prior week -- and down 122 basis-points from the year ago mark.
The mixed signal from the economy was enough to induce a round of selling in the stock markets. As capital leaves riskier asset classes like stocks - it is typically looking for a safe place in which to hang-out - and that is a condition that tends to make government debt obligations and mortgage-backed securities shine as an attractive sanctuary for these money flows. The more money that flows into the credit markets - and particularly into mortgage-backed securities - the more supportive it becomes of the prospects for steady to perhaps fractionally lower mortgage interest rates.
The timing of ramped-up selling pressure in the equity markets could not have come at a better time from a credit market perspective. Uncle Sam is conducting an auction today looking to borrow $41 billion in the form of 5-year notes. The more aggressive the bidding becomes for these securities -- the better the prospects for steady to perhaps fractionally lower mortgage interest rates. The first two legs of this week's Treasury auctions - Monday's $7 billion of 5-year inflation indexed securities and yesterday's $44 billion of 2-year notes - drew slightly better-than-expected demand. If today's 5-year note sale keeps the string alive this event's impact on the trend trajectory of mortgage interest rates will likely be very limited. In the off-chance today's 5-year note sale is a bust - look for mortgage interest rates to edge higher before the end of the day.
Tuesday, October 27, 2009
Tuesday, October 27, 2009
The mortgage market is off to a friendly start today after the Conference Board, a private research group, said its barometer on consumer confidence slipped to 47.7 in October from a revised 53.4 in September.
Detail in this morning's report showed consumers' assessment of present conditions dropped to its lowest level since February 1985 while the number of people who said jobs are hard to get increased to a reading of 49.6 -- its highest level since 1983. Consumers are obviously "bummed" in a big way - reviving worries among market participants about the sustainability of the economic recovery. The folks on Main Street are obviously still very fearful about their ability to get and hold a job, which is a clear threat to spending - and by extension - to the nation's prospects for recovery from the Great Recession.
In the convoluted world of the mortgage market -- slumping economic activity tends to reduce the demand for capital - which in-turn tends to be supportive of steady to perhaps fractionally lower rates. The growing likelihood of "Grinch-like" holiday sales may soon begin to take an increasingly large toll on stock valuations. If so, a significant amount of the capital fleeing these riskier asset classes will likely find its way into the "safe-harbor" of government debt obligations and mortgage-backed securities - and that's never a bad thing from a rate sheet perspective.
Uncle Sam will be in the credit market looking to borrow $44 billion in the form of 2-year notes today. The short-duration of these debt obligations -- together with the fact their yield is near its highest level in more than a month -- will likely combine to draw solid demand from global and domestic investors alike. Look for this event to have little, if any noticeable impact on the trend trajectory of mortgage interest rates today.
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Detail in this morning's report showed consumers' assessment of present conditions dropped to its lowest level since February 1985 while the number of people who said jobs are hard to get increased to a reading of 49.6 -- its highest level since 1983. Consumers are obviously "bummed" in a big way - reviving worries among market participants about the sustainability of the economic recovery. The folks on Main Street are obviously still very fearful about their ability to get and hold a job, which is a clear threat to spending - and by extension - to the nation's prospects for recovery from the Great Recession.
In the convoluted world of the mortgage market -- slumping economic activity tends to reduce the demand for capital - which in-turn tends to be supportive of steady to perhaps fractionally lower rates. The growing likelihood of "Grinch-like" holiday sales may soon begin to take an increasingly large toll on stock valuations. If so, a significant amount of the capital fleeing these riskier asset classes will likely find its way into the "safe-harbor" of government debt obligations and mortgage-backed securities - and that's never a bad thing from a rate sheet perspective.
Uncle Sam will be in the credit market looking to borrow $44 billion in the form of 2-year notes today. The short-duration of these debt obligations -- together with the fact their yield is near its highest level in more than a month -- will likely combine to draw solid demand from global and domestic investors alike. Look for this event to have little, if any noticeable impact on the trend trajectory of mortgage interest rates today.
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Monday, October 26, 2009
Monday, October 26, 2009
The mortgage market was under siege earlier this morning as stock market gains curbed the safe-haven appeal of government debt obligations and mortgage-backed securities. The last thing the credit markets need is a distracting influence as Uncle Sam prepares to borrow a record volume of $123 billion in a four-part auction this week.
The government's borrowing binge will kick-off today with $7 billion of 5-year inflation-indexed securities followed by tomorrow's $44 billion in the form of 2-year notes, Wednesday's $41 billion of 5-year note sale and concluding on Thursday with a $31 billion 7-year notes offering.
So far this year, domestic and foreign investor demand for these debt obligations has been high - despite lingering anxiety over a ballooning U.S. government budget deficit and its potential impact on the long-term credit-worthiness of the United States.
As we come into this week's record setting debt offering the credit markets have a couple of things going for it that could be supportive of the prospects for solid auction demand - a condition which also tends to be supportive of a least steady mortgage interest rates.
(1) The stock markets appear to be in the early phase of a mild downward correction. If the assessment proves correct this relatively shallow correction that will likely continue through the Thanksgiving break. Falling stock prices tend to spawn "flight-to-quality" buying sprees favoring safe haven assets like government debt obligations and mortgage-backed securities. There is absolutely no reason to believe a swoon in the stock markets would not create the same result this time around.
(2) The value of the dollar has taken a beating on foreign currency exchanges -- and believe it or not - that is a situation that may actually serve to ramp-up demand for U.S. government debt obligations - especially by overseas investors. Those investors choosing to buy dollar-denominated assets with other more strongly valued currencies will be acquiring Uncle Sam's highest-quality debt instruments at "blue-light-special" prices -- on a currency adjusted basis.
A soft dollar stands a very good change of greasing-the-skids for this week's barrage of Treasury auctions - a scenario that will likely prove to be at worst -- mortgage market neutral.
There is, of course, a second side to this coin. If domestic and foreign investors choose to stay on the sidelines this week for whatever reason - look for mortgage interest rates to move higher. While such an outcome is certainly possible - at this juncture it does not appear to be highly probable.
The government's borrowing binge will kick-off today with $7 billion of 5-year inflation-indexed securities followed by tomorrow's $44 billion in the form of 2-year notes, Wednesday's $41 billion of 5-year note sale and concluding on Thursday with a $31 billion 7-year notes offering.
So far this year, domestic and foreign investor demand for these debt obligations has been high - despite lingering anxiety over a ballooning U.S. government budget deficit and its potential impact on the long-term credit-worthiness of the United States.
As we come into this week's record setting debt offering the credit markets have a couple of things going for it that could be supportive of the prospects for solid auction demand - a condition which also tends to be supportive of a least steady mortgage interest rates.
(1) The stock markets appear to be in the early phase of a mild downward correction. If the assessment proves correct this relatively shallow correction that will likely continue through the Thanksgiving break. Falling stock prices tend to spawn "flight-to-quality" buying sprees favoring safe haven assets like government debt obligations and mortgage-backed securities. There is absolutely no reason to believe a swoon in the stock markets would not create the same result this time around.
(2) The value of the dollar has taken a beating on foreign currency exchanges -- and believe it or not - that is a situation that may actually serve to ramp-up demand for U.S. government debt obligations - especially by overseas investors. Those investors choosing to buy dollar-denominated assets with other more strongly valued currencies will be acquiring Uncle Sam's highest-quality debt instruments at "blue-light-special" prices -- on a currency adjusted basis.
A soft dollar stands a very good change of greasing-the-skids for this week's barrage of Treasury auctions - a scenario that will likely prove to be at worst -- mortgage market neutral.
There is, of course, a second side to this coin. If domestic and foreign investors choose to stay on the sidelines this week for whatever reason - look for mortgage interest rates to move higher. While such an outcome is certainly possible - at this juncture it does not appear to be highly probable.
Friday, October 23, 2009
Friday, October 23, 2009
As the week winds down mortgage investors are putting the final touches on their risk management strategies in front of next week's record setting deluge of government debt.
Uncle Sam will be in the credit markets looking to borrow a record volume of $123 billion in the form of two-, five-, and seven-year notes in tandem with a batch of 5-year inflation protected securities. The coming week's round of government borrowing handily beats the previous record of $115 billion set in July. S
o far this year, the massive amount of supply Uncle Sam has pumped into the credit markets has been absorbed without much problem -- simply because there is a lot of cash out there looking for a safe home. If trading action in the equity market is wobbly next week - it is likely these government debt obligations will be well bid -- causing them to exert little, if any upward pressure on mortgage interest rates. As always there is a flip-side to every coin, weak bidding at next week's government debt sale will almost certainly leach into the mortgage market -- producing higher rates and notably lower prices. At this juncture, there is reason to consider this latter scenario to be a low probability outcome.
Next week's schedule of macro-economic data will almost surely draw more than a passing glance from mortgage investors - particularly Thursday's first estimate of third-quarter Gross Domestic Product (8:30 a.m. ET) and the core personal consumption and expenditure component of the September Income and Spending data to be released at 8:30 a.m. ET on Friday. The majority of economists expect economic growth during the third-quarter accelerated at a brisk 3.3% pace. Mortgage investors have already priced-in that forecast as well expectations the core rate of inflation as measured by the September personal consumption and expenditure index did not exceed 0.2%. Should the actual numbers match or fall below these consensus forecast values - look for these economic reports to have little, if any noticeably impact on the trend trajectory of mortgage interest rates.
Earlier this morning the National Association of Realtors reported existing homes sales - including single-family, townhomes, condos and co-ops - jumped 9.4% higher last month. Lawrence Yun, NAR chief economist, said, "Much of the momentum is from people responding to the first-time buyer tax credit, which is freeing many sellers to take a trade and buy another home." The Association's data shows first-time home buyers accounted for more than 45% of home sales during the past year. A separate set of data shows that distressed homes accounted for 29% of transactions in September. Mortgage investors largely discounted the big surge in September existing home sales - reasoning the trajectory of sales will slip notably lower in the fourth-quarter following the expiration of the first-time home-buyer program at the end of November.
Stock market investors are continuing to make strong bets that corporate earnings will continue to "surprise" to the high side of expectations. The earnings season is still very young - with the majority of companies still due to turn in their third-quarter financial performance report cards. If these remaining companies successfully follow the current pattern of posting better-than-expected earnings -- stock markets will likely find sufficient justification continue to rally at the expense of fractionally higher mortgage interest rates.
On the other hand, if the remaining companies fail to solidly beat current earnings expectations, their stock price will likely begin to fall. The larger the number of under-performing companies (as compared to analysts' expectations) the stronger the likelihood stock markets will roll-over into a heavy sell-off - a condition that will tend to be strongly supportive of steady to fractionally lower mortgage interest rates.
Uncle Sam will be in the credit markets looking to borrow a record volume of $123 billion in the form of two-, five-, and seven-year notes in tandem with a batch of 5-year inflation protected securities. The coming week's round of government borrowing handily beats the previous record of $115 billion set in July. S
o far this year, the massive amount of supply Uncle Sam has pumped into the credit markets has been absorbed without much problem -- simply because there is a lot of cash out there looking for a safe home. If trading action in the equity market is wobbly next week - it is likely these government debt obligations will be well bid -- causing them to exert little, if any upward pressure on mortgage interest rates. As always there is a flip-side to every coin, weak bidding at next week's government debt sale will almost certainly leach into the mortgage market -- producing higher rates and notably lower prices. At this juncture, there is reason to consider this latter scenario to be a low probability outcome.
Next week's schedule of macro-economic data will almost surely draw more than a passing glance from mortgage investors - particularly Thursday's first estimate of third-quarter Gross Domestic Product (8:30 a.m. ET) and the core personal consumption and expenditure component of the September Income and Spending data to be released at 8:30 a.m. ET on Friday. The majority of economists expect economic growth during the third-quarter accelerated at a brisk 3.3% pace. Mortgage investors have already priced-in that forecast as well expectations the core rate of inflation as measured by the September personal consumption and expenditure index did not exceed 0.2%. Should the actual numbers match or fall below these consensus forecast values - look for these economic reports to have little, if any noticeably impact on the trend trajectory of mortgage interest rates.
Earlier this morning the National Association of Realtors reported existing homes sales - including single-family, townhomes, condos and co-ops - jumped 9.4% higher last month. Lawrence Yun, NAR chief economist, said, "Much of the momentum is from people responding to the first-time buyer tax credit, which is freeing many sellers to take a trade and buy another home." The Association's data shows first-time home buyers accounted for more than 45% of home sales during the past year. A separate set of data shows that distressed homes accounted for 29% of transactions in September. Mortgage investors largely discounted the big surge in September existing home sales - reasoning the trajectory of sales will slip notably lower in the fourth-quarter following the expiration of the first-time home-buyer program at the end of November.
Stock market investors are continuing to make strong bets that corporate earnings will continue to "surprise" to the high side of expectations. The earnings season is still very young - with the majority of companies still due to turn in their third-quarter financial performance report cards. If these remaining companies successfully follow the current pattern of posting better-than-expected earnings -- stock markets will likely find sufficient justification continue to rally at the expense of fractionally higher mortgage interest rates.
On the other hand, if the remaining companies fail to solidly beat current earnings expectations, their stock price will likely begin to fall. The larger the number of under-performing companies (as compared to analysts' expectations) the stronger the likelihood stock markets will roll-over into a heavy sell-off - a condition that will tend to be strongly supportive of steady to fractionally lower mortgage interest rates.
Wednesday, October 21, 2009
Wednesday, October 21, 2009
Improving stock market performance driven by better-than-expected corporate earnings and the imminent retreat of the Federal Reserve as a direct buyer of Treasury debt are the "one-two punch" behind this morning's price swoon = HIGHER RATES = in the mortgage market.
So far in this early part of the corporate earnings season financial performance results from American businesses have generally exceeded analysts expectations, feeding speculation that the economy overall is solidly on the road to recovery. That growing mindset among capital sources has undermined the safe haven appeal of government debt obligations and mortgage-backed securities - resulting in upward pressure on mortgage interest rates.
The upward pressure on mortgage interest rates is being compounded as the Fed moves through the final stages of their commitment to directly purchase $300 billion of government debt obligations. They have already spent $297 billion of the funding available for this program. After today's small acquisition, they are scheduled to make their last purchase under current program guidelines on Thursday, October 29th. The exit of a big checkbook buyer from the market place has inevitably put some downward pressure on prices today - but the overall impact of the Fed's retreat will almost certainly be short-lived as freely trade markets tend to seek their natural balance points pretty quickly following a disruption. Investors' memories tend to be pretty short.
In other news of the day the Mortgage Bankers of America said their seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, slid 13.7% lower during the week ended October 16th. Applications to buy a home, a tentative indicator of sales, dropped 7.6% lower from the previous week while refinance applications fell 16.8%. The MBA said borrowing costs on 30-year fixed rate mortgages, excluding fees, rose 0.05 percentage points from the previous week to average 5.07%. This was above the all-time low of 4.61% set in March, but well below the 6.28% level of a year ago.
So far in this early part of the corporate earnings season financial performance results from American businesses have generally exceeded analysts expectations, feeding speculation that the economy overall is solidly on the road to recovery. That growing mindset among capital sources has undermined the safe haven appeal of government debt obligations and mortgage-backed securities - resulting in upward pressure on mortgage interest rates.
The upward pressure on mortgage interest rates is being compounded as the Fed moves through the final stages of their commitment to directly purchase $300 billion of government debt obligations. They have already spent $297 billion of the funding available for this program. After today's small acquisition, they are scheduled to make their last purchase under current program guidelines on Thursday, October 29th. The exit of a big checkbook buyer from the market place has inevitably put some downward pressure on prices today - but the overall impact of the Fed's retreat will almost certainly be short-lived as freely trade markets tend to seek their natural balance points pretty quickly following a disruption. Investors' memories tend to be pretty short.
In other news of the day the Mortgage Bankers of America said their seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, slid 13.7% lower during the week ended October 16th. Applications to buy a home, a tentative indicator of sales, dropped 7.6% lower from the previous week while refinance applications fell 16.8%. The MBA said borrowing costs on 30-year fixed rate mortgages, excluding fees, rose 0.05 percentage points from the previous week to average 5.07%. This was above the all-time low of 4.61% set in March, but well below the 6.28% level of a year ago.
Tuesday, October 20, 2009
Tuesday, October 20, 2009
New construction of U.S. homes rose less than expected in September as ground-breaking activity for multi-family homes fell sharply, highlighting the economy's uneven path to recovery.
Construction of new single family homes, which account for about 85% of the homebuilding industry, increased 3.9% last month.
Work on multi-family units, which make up the rest of the housing industry, fell by 15% over the same time period - slashing the overall housing start number to a modest gain of 0.5%. Total permits, a measure of future construction activity, fell by 1.2% in September.
The overall story here is that homebuilding is healing - but at a very slow pace. The imminent end of the first-time homebuyer tax credit on December 1st is likely responsible for that oversized drop in the September building and permits figures. No one is sure what the demand curve will look like once government sponsored support programs for homebuyers are terminated -- so homebuilders are taking a "rather-safe-than-sorry" approach to adding new inventory.
A separate report from the Labor Department showed prices paid at the farm and factory gate fell an unexpected 0.6% in September -- primarily as the result of a 2.4% decline in energy prices. Excluding the more volatile food and energy costs, the core producer price index actually declined by 0.1% from its August mark. Most analysts had anticipated the core rate of inflation at the wholesale level would climb 0.2% higher. With output and employment growth expected to remain modest until at least mid-2010 - producer price inflation will almost certainly have little, if any direct influence on the trend trajectory of mortgage interest rates for many months to come.
As mentioned here yesterday -- it is highly likely that trading action in the stock markets will exert the strongest influence on the trend trajectory of mortgage interest rates this week. After a 60% run-up in the stock market since March -- and with the DOW again trading above the psychologically important mark of 10,000 - stock market investors are making strong bets that corporate earnings will continue to "surprise" to the high side of expectations.
According to Thomson Reuters data -- 79% of the companies in the S&P 500 that have already reported third-quarter operating results have exceeded Wall Street expectations. The earnings season is still very young - with roughly 400 of the S&P 500 companies still due to turn in their third-quarter financial performance report cards. If these remaining companies successfully follow the current pattern -- stock markets will almost certainly continue to rally at the expense of fractionally higher mortgage interest rates.
On the other hand, if the remaining companies fail to solidly beat current earnings expectations, their stock will likely begin to sell-off. The larger the number of under-performing companies (as compared to analysts' expectations) the stronger the likelihood stock markets will roll-over into a heavy sell-off - a condition that will tend to be strongly supportive of steady to fractionally lower mortgage interest rates.
Well before the end of the month the belief is we will know decisively whether stock market trading activity is going to spook mortgage investors into pushing mortgage interest rates higher - or whether a slump in share prices will treat mortgage market participants to another round of fractionally lower mortgage interest rates.
Construction of new single family homes, which account for about 85% of the homebuilding industry, increased 3.9% last month.
Work on multi-family units, which make up the rest of the housing industry, fell by 15% over the same time period - slashing the overall housing start number to a modest gain of 0.5%. Total permits, a measure of future construction activity, fell by 1.2% in September.
The overall story here is that homebuilding is healing - but at a very slow pace. The imminent end of the first-time homebuyer tax credit on December 1st is likely responsible for that oversized drop in the September building and permits figures. No one is sure what the demand curve will look like once government sponsored support programs for homebuyers are terminated -- so homebuilders are taking a "rather-safe-than-sorry" approach to adding new inventory.
A separate report from the Labor Department showed prices paid at the farm and factory gate fell an unexpected 0.6% in September -- primarily as the result of a 2.4% decline in energy prices. Excluding the more volatile food and energy costs, the core producer price index actually declined by 0.1% from its August mark. Most analysts had anticipated the core rate of inflation at the wholesale level would climb 0.2% higher. With output and employment growth expected to remain modest until at least mid-2010 - producer price inflation will almost certainly have little, if any direct influence on the trend trajectory of mortgage interest rates for many months to come.
As mentioned here yesterday -- it is highly likely that trading action in the stock markets will exert the strongest influence on the trend trajectory of mortgage interest rates this week. After a 60% run-up in the stock market since March -- and with the DOW again trading above the psychologically important mark of 10,000 - stock market investors are making strong bets that corporate earnings will continue to "surprise" to the high side of expectations.
According to Thomson Reuters data -- 79% of the companies in the S&P 500 that have already reported third-quarter operating results have exceeded Wall Street expectations. The earnings season is still very young - with roughly 400 of the S&P 500 companies still due to turn in their third-quarter financial performance report cards. If these remaining companies successfully follow the current pattern -- stock markets will almost certainly continue to rally at the expense of fractionally higher mortgage interest rates.
On the other hand, if the remaining companies fail to solidly beat current earnings expectations, their stock will likely begin to sell-off. The larger the number of under-performing companies (as compared to analysts' expectations) the stronger the likelihood stock markets will roll-over into a heavy sell-off - a condition that will tend to be strongly supportive of steady to fractionally lower mortgage interest rates.
Well before the end of the month the belief is we will know decisively whether stock market trading activity is going to spook mortgage investors into pushing mortgage interest rates higher - or whether a slump in share prices will treat mortgage market participants to another round of fractionally lower mortgage interest rates.
Monday, October 19, 2009
Monday, October 19, 2009
The coming week doesn't offer much in the way of potentially mortgage market moving economic data. Tuesday's September Housing Starts and Building Permits numbers together with the September Producer Price Index figures will likely draw little more than a passing glance from mortgage investors.
Friday's September Existing Home Sales numbers might generate some upward pressure on mortgage interest rates if it shows a gain of more than 5.0% -- while certainly possible -- such an outcome is not currently considered very probable.
It is highly likely that trading action in the stock markets will exert the strongest influence on the trend trajectory of mortgage interest rates this week. After a 60% run-up in the stock market since March -- and with the DOW again trading above the psychologically important mark of 10,000 - stock market investors are making strong bets that corporate earnings will continue to "surprise" to the high side of expectations.
According to Thomson Reuters data, 61 companies in the S&P 500 have reported third-quarter results by last Friday - and 79% of them beat Wall Street expectations. If the remaining 439 companies who have yet report earnings follow the current pattern -- stock markets will almost certainly continue to rally at the expense of fractionally higher mortgage interest rates. On the other hand, if the remaining companies fail to solidly beat current earnings expectations, their stock will likely being to sell-off. The larger the number of under-performing companies (as compared to analysts' expectations) the stronger the likelihood stock markets will roll-over into a heavy sell-off - a condition that will tend to be strongly supportive of steady to fractionally lower mortgage interest rates.
Well before the end of the month we will know decisively whether stock market trading activity is going to spook mortgage investors into pushing mortgage interest rates higher - or whether a slump in share prices will treat mortgage market participants to another round of fractionally lower mortgage interest rates.
Stay Tuned...
Friday's September Existing Home Sales numbers might generate some upward pressure on mortgage interest rates if it shows a gain of more than 5.0% -- while certainly possible -- such an outcome is not currently considered very probable.
It is highly likely that trading action in the stock markets will exert the strongest influence on the trend trajectory of mortgage interest rates this week. After a 60% run-up in the stock market since March -- and with the DOW again trading above the psychologically important mark of 10,000 - stock market investors are making strong bets that corporate earnings will continue to "surprise" to the high side of expectations.
According to Thomson Reuters data, 61 companies in the S&P 500 have reported third-quarter results by last Friday - and 79% of them beat Wall Street expectations. If the remaining 439 companies who have yet report earnings follow the current pattern -- stock markets will almost certainly continue to rally at the expense of fractionally higher mortgage interest rates. On the other hand, if the remaining companies fail to solidly beat current earnings expectations, their stock will likely being to sell-off. The larger the number of under-performing companies (as compared to analysts' expectations) the stronger the likelihood stock markets will roll-over into a heavy sell-off - a condition that will tend to be strongly supportive of steady to fractionally lower mortgage interest rates.
Well before the end of the month we will know decisively whether stock market trading activity is going to spook mortgage investors into pushing mortgage interest rates higher - or whether a slump in share prices will treat mortgage market participants to another round of fractionally lower mortgage interest rates.
Stay Tuned...
Thursday, October 15, 2009
Thursday, October 15, 2009
The trend trajectory of stocks and stronger-than-expected news from the labor sector and a slight uptick in the core consumer price index have combined to put additional upward pressure on mortgage interest rates during the early part of the trading day.
The uncertain start to the day for the stock markets has buffeted the mortgage market. The DOW has been whipsawing back and forth in a 50 point range during the first-half of the day - as the psychologically important 10,000 level is subjected to its first half-hearted sustainability test. Falling stock prices tend to be supportive of steady to fractionally lower mortgage interest rates while rising stock prices generally drag mortgage interest rates fractionally higher.
In a report confirming inflation pressures remain benign the Labor Department said its aggregate Consumer Price Index rose by 0.2% in September after posting a gain of 0.4% a month earlier. Stripping out volatile food and energy prices, the closely watched core measure of consumer inflation inched up to a reading of 0.2% -- a touch higher than most mortgage investors had been expecting. As zealously as these investors are protecting profits -- the ever so slight gain in the core rate of consumer inflation has evidently been deemed sufficient justification to push mortgage interest rates fractionally higher. That seems a bit of an extreme reaction to such a mild number - but then again we are dealing with the "Golden Rule" here - you know the one - "he/she who has the gold makes the rules".
In a separate report the Labor Department announced first-time claims for jobless benefits fell by 10,000 during the week ended October 10th. The decline was generally in range of investor expectations. Today's report marks the fifth consecutive decline for this economic metric in the past six weeks. This data tells a story of dwindling layoffs -- but detail in the report also shows the pace of hiring is nothing more than a trickle. The number of those claiming extended benefits or enrolling in the Emergency Unemployment Compensation programs continues to grow - and that's a situation that is not expected to start flashing signs of meaningful improvement until mid-2010.
All-in-all today's round of macro-economic data was pretty tame - so selling pressure is likely coming from some other area of concern - such as the inevitability of the Fed's withdrawal from the marketplace as the most aggressive buyer of mortgage-backed securities. From the first of the year the Fed has purchased roughly 80% of all the agency eligible mortgage-backed securities available - elbowing out a lot of private sector investors in the process. Now that the price of these securities are within shouting distance of their all-time high the Fed is asking the private sector to dive back into the marketplace. There is little doubt the private sector still maintains a healthy appetite for agency eligible mortgage-backed securities - but probably not at current price levels. If that assessment proves accurate, look for mortgage interest rates to begin a slow but progressive move to levels 50 basis point to 100 basis points higher than current levels within the next 12 months - no matter what the rest of the macro-economic picture might, or might not look like.
The uncertain start to the day for the stock markets has buffeted the mortgage market. The DOW has been whipsawing back and forth in a 50 point range during the first-half of the day - as the psychologically important 10,000 level is subjected to its first half-hearted sustainability test. Falling stock prices tend to be supportive of steady to fractionally lower mortgage interest rates while rising stock prices generally drag mortgage interest rates fractionally higher.
In a report confirming inflation pressures remain benign the Labor Department said its aggregate Consumer Price Index rose by 0.2% in September after posting a gain of 0.4% a month earlier. Stripping out volatile food and energy prices, the closely watched core measure of consumer inflation inched up to a reading of 0.2% -- a touch higher than most mortgage investors had been expecting. As zealously as these investors are protecting profits -- the ever so slight gain in the core rate of consumer inflation has evidently been deemed sufficient justification to push mortgage interest rates fractionally higher. That seems a bit of an extreme reaction to such a mild number - but then again we are dealing with the "Golden Rule" here - you know the one - "he/she who has the gold makes the rules".
In a separate report the Labor Department announced first-time claims for jobless benefits fell by 10,000 during the week ended October 10th. The decline was generally in range of investor expectations. Today's report marks the fifth consecutive decline for this economic metric in the past six weeks. This data tells a story of dwindling layoffs -- but detail in the report also shows the pace of hiring is nothing more than a trickle. The number of those claiming extended benefits or enrolling in the Emergency Unemployment Compensation programs continues to grow - and that's a situation that is not expected to start flashing signs of meaningful improvement until mid-2010.
All-in-all today's round of macro-economic data was pretty tame - so selling pressure is likely coming from some other area of concern - such as the inevitability of the Fed's withdrawal from the marketplace as the most aggressive buyer of mortgage-backed securities. From the first of the year the Fed has purchased roughly 80% of all the agency eligible mortgage-backed securities available - elbowing out a lot of private sector investors in the process. Now that the price of these securities are within shouting distance of their all-time high the Fed is asking the private sector to dive back into the marketplace. There is little doubt the private sector still maintains a healthy appetite for agency eligible mortgage-backed securities - but probably not at current price levels. If that assessment proves accurate, look for mortgage interest rates to begin a slow but progressive move to levels 50 basis point to 100 basis points higher than current levels within the next 12 months - no matter what the rest of the macro-economic picture might, or might not look like.
Wednesday, October 14, 2009
Wednesday, October 14, 2009
The mortgage market is getting slapped around this morning by the combination of strong stock market performance and data showing the pace of September retail sales was healthier than expected. These two developments combined to reduce the appeal of safe-haven investments like government debt obligations and agency eligible mortgage-backed securities.
Retail sales actually increased for a second straight month in September once the volatile auto component is stripped put. This was a strong retail sales report with few segments showing sales declines. It appears many mortgage investors are viewing the broad-based improvements as an indication Americans are becoming more confident the economy is recovering -- even as job losses persist. It is worth noting that most of the gain in retail sales (excluding autos) was lead by warehouse clubs and supercenters -- which is evidence that consumers are trading down in their purchases. Rather than shopping at department stores consumers are shopping at warehouse clubs and rather than going out to eat at restaurants -- sales at grocery stores are increasing. The "so what" factor here is the data clearly shows consumers remain financially constrained. Consumers simply lack the cash to spend aggressively -- which by extension is an indication that overall economic growth will almost surely remain limited until job creation and the attendant wage and salary growth improves significantly.
In a separate report the Mortgage Bankers of America said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, decreased 1.8% during the week of October 9th. Applications to buy a home, seen as a tentative indicator of sales, dropped 5.0% while refinance applications slipped 0.1% lower. Borrowing costs on 30-year fixed-rate agency eligible mortgages, excluding fees, averaged 5.02 percent, up 0.13 percentage points from the pervious week. The 30-year rate remained above the all-time low of 4.61 percent set during the week ended March 27th but well below the year-ago level of 6.47%.
www.masonspointe.com
Thursday, October 8, 2009
Thursday, October 8, 2009
Today's sale of $12 billion of 30-year bonds will conclude this week's $78 billion, four-part borrowing spree by Uncle Sam. Dealers will likely approach today's auction a little more cautiously than they originally intended prior to the release of this morning's surprisingly strong initial jobless claims report from the Labor Department.
The government said their data shows the number of American workers filing first-time jobless claims dropped 33,000 during the week ended October 3rd - completely offsetting the prior week's increase and reaching a nine-month low for this measure of labor sector health. The four-week moving average for new claims, considered a better gauge of underlying trends since it irons out week-to-week volatility, declined for the fifth straight week. According to analysis provided by the "Dismal Scientist", initial claims appear to be falling as quickly in this cycle as they had following the major recession of the mid-1970's and early 1980's - a hopeful indication of better days to come for the unemployed. It is still far too early to declare the crisis in the labor sector is over - but there is an increasing number of signs hinting the worst of the disaster may have passed.
Companies are now in a position where further job cuts will be limited - but it will probably be a number of months yet before the "now hiring" signs go up in significant numbers. Until then -- the story from the labor sector will tend to support steady to perhaps fractionally lower mortgage interest rates.
The government said their data shows the number of American workers filing first-time jobless claims dropped 33,000 during the week ended October 3rd - completely offsetting the prior week's increase and reaching a nine-month low for this measure of labor sector health. The four-week moving average for new claims, considered a better gauge of underlying trends since it irons out week-to-week volatility, declined for the fifth straight week. According to analysis provided by the "Dismal Scientist", initial claims appear to be falling as quickly in this cycle as they had following the major recession of the mid-1970's and early 1980's - a hopeful indication of better days to come for the unemployed. It is still far too early to declare the crisis in the labor sector is over - but there is an increasing number of signs hinting the worst of the disaster may have passed.
Companies are now in a position where further job cuts will be limited - but it will probably be a number of months yet before the "now hiring" signs go up in significant numbers. Until then -- the story from the labor sector will tend to support steady to perhaps fractionally lower mortgage interest rates.
Wednesday, October 7, 2009
Wednesday, October 7, 2009
The Treasury Department is gearing up this morning to conduct its third auction of the week. The government will be taking bids on $20 billion of 10-year notes. The final gavel is slated to fall at 1:00 p.m. ET.
A well bid 10-year note auction followed by solid demand for tomorrow's 30-year bond offering will be viewed by many as a solid indication that fixed-income investors see no looming threat of inflation anywhere on the horizon - which by extension - suggests these investors believe economic growth will once again begin to wane in 2010. The good news here is that mortgage interest rates will almost certainly continue to hover within a whisper of historic lows while the bad news is that the demand for mortgage financing will likely continue to contract as joblessness rises and the consumer develops a "bunker mentality" with respect to spending of any sort.
On the other hand, if the Treasury's 10-year note and 30-year bond offering result in higher yields for both of these instruments, fixed-income investors will be putting their-money-where-their-mouth-is with respect to their belief the sustained economic growth will prevail -- which will in-turn lead to an increase in employment opportunities followed by a notable increase in mortgage demand. Granted, if this scenario develops it will set the stage for a slow but progressive move to higher mortgage interest rates. If such an event were to occur - it may actually prove to be a "good thing" in terms of origination volumes.
As mentioned before in this space before, there are an increasing number of reasons to think we've reached a point in the economic cycle where a modest uptick in mortgage interest rates created by accelerating economic growth will actually lead to the development of a far better market place for mortgage originators than a economic backdrop that supports yet lower mortgage interest rates could ever come close to generating.
It is Wednesday - which means the Mortgage Bankers of America have released their index of mortgage applications for the most recent week -- ended October 2nd. The aggregate index, which includes both purchase and refinance loans, rose 16.4% to its highest level since the week ended May 22nd. Requests for purchase money mortgages were up 13.2% while requests for refinance funding were up 18.2%. The refinance share of applications on a national basis rose to 66.3% from 65.3% the previous week, but remained well below the peak of 85.3% during the week ended January 9th. The MBA went on to report 30-year fixed-rate mortgages, excluding fees, averaged 4.89%, down 0.05 percentage points from the previous week and the lowest since the week ended May 22nd. Last week's 30-year conforming fixed-rate was above the all-time low of 4.61% set back during the week of March 27th - but well below the year-ago mark of 5.99%.
A well bid 10-year note auction followed by solid demand for tomorrow's 30-year bond offering will be viewed by many as a solid indication that fixed-income investors see no looming threat of inflation anywhere on the horizon - which by extension - suggests these investors believe economic growth will once again begin to wane in 2010. The good news here is that mortgage interest rates will almost certainly continue to hover within a whisper of historic lows while the bad news is that the demand for mortgage financing will likely continue to contract as joblessness rises and the consumer develops a "bunker mentality" with respect to spending of any sort.
On the other hand, if the Treasury's 10-year note and 30-year bond offering result in higher yields for both of these instruments, fixed-income investors will be putting their-money-where-their-mouth-is with respect to their belief the sustained economic growth will prevail -- which will in-turn lead to an increase in employment opportunities followed by a notable increase in mortgage demand. Granted, if this scenario develops it will set the stage for a slow but progressive move to higher mortgage interest rates. If such an event were to occur - it may actually prove to be a "good thing" in terms of origination volumes.
As mentioned before in this space before, there are an increasing number of reasons to think we've reached a point in the economic cycle where a modest uptick in mortgage interest rates created by accelerating economic growth will actually lead to the development of a far better market place for mortgage originators than a economic backdrop that supports yet lower mortgage interest rates could ever come close to generating.
It is Wednesday - which means the Mortgage Bankers of America have released their index of mortgage applications for the most recent week -- ended October 2nd. The aggregate index, which includes both purchase and refinance loans, rose 16.4% to its highest level since the week ended May 22nd. Requests for purchase money mortgages were up 13.2% while requests for refinance funding were up 18.2%. The refinance share of applications on a national basis rose to 66.3% from 65.3% the previous week, but remained well below the peak of 85.3% during the week ended January 9th. The MBA went on to report 30-year fixed-rate mortgages, excluding fees, averaged 4.89%, down 0.05 percentage points from the previous week and the lowest since the week ended May 22nd. Last week's 30-year conforming fixed-rate was above the all-time low of 4.61% set back during the week of March 27th - but well below the year-ago mark of 5.99%.
Tuesday, October 6, 2009
Tuesday, October 6, 2009
Investors are making space in their portfolios for today's record supply of three-year notes - resulting in a weak start for the mortgage market.
Today's auction follows yesterday's very successful offering of 10-year Inflation-Protected Securities. Most analysts strongly believe the 3-year notes will draw an equally strong demand from buyers. There is some slight concern that the Chinese week long, national holiday may result in lower foreign investor participation than normal - but in terms of the 3-year notes - the impact should be minimal.
There are concerns about the market's ability to absorb tomorrow's $20 billion of 10-year notes without the full support of the Chinese credit market participants. Since June the overall demand for Treasury debt by both domestic and international investors has remained brisk - as our economy shank deeper into the depths of a massive recession, the dollar fell on international currency markets, inflation was a "no show" and the Fed pledged that their benchmark short-term interest rates would remain near zero. Even so, trees-don't-growth-to-the-sky and investors' appetite for any class of asset eventually wanes.
In the world of single-family mortgages fixed income investors, those that buy assets like longer-dated Treasury debt obligations and mortgage-backed securities, by necessity live in the future - not the present. The radars for these "guys" are focused six months or more into the future and their trades are driven largely by the perception of "what-will-be" - rather than shorter-term (day or days) traders who focus more simply on "what is". It is this very distinctive difference between trading styles that can/will create an environment of rising mortgage interest rates in a period of time when near-term macro-economic reports suggest rates should be trending steady to lower.
A well bid 10-year note auction tomorrow and solid demand for Thursday's 30-year bond offering will be viewed by many as a solid indication that fixed-income investors see no looming threat of inflation anywhere on the horizon - which by extension - suggests these investors believe economic growth will once again begin to wane in 2010. The good news here is that mortgage interest rates will almost certainly continue to hover within a whisper of historic lows while the bad news is that the demand for mortgage financing will likely continue to contract as joblessness rises and the consumer develops a "bunker mentality" with respect to spending of any sort.
On the other hand, if the Treasury's 10-year note and 30-year bond offering result in higher yields for both of these instruments, fixed-income investors will be putting their-money-where-their-mouth-is with respect to their belief the sustained economic growth will prevail -- which will in-turn lead to an increase in employment opportunities followed by a notable increase in mortgage demand. Granted, if this scenario develops it will set the stage for a slow but progressive move to higher mortgage interest rates - which may actually prove to be a "good thing".
As mentioned in this space before, there are an increasing number of reasons to think we've reached a point in the economic cycle where a modest uptick in mortgage interest rates created by accelerating economic growth will actually create a better market place for mortgage originators -- than a economic backdrop that supports yet lower mortgage interest rates could ever come close to generating.
Today's auction follows yesterday's very successful offering of 10-year Inflation-Protected Securities. Most analysts strongly believe the 3-year notes will draw an equally strong demand from buyers. There is some slight concern that the Chinese week long, national holiday may result in lower foreign investor participation than normal - but in terms of the 3-year notes - the impact should be minimal.
There are concerns about the market's ability to absorb tomorrow's $20 billion of 10-year notes without the full support of the Chinese credit market participants. Since June the overall demand for Treasury debt by both domestic and international investors has remained brisk - as our economy shank deeper into the depths of a massive recession, the dollar fell on international currency markets, inflation was a "no show" and the Fed pledged that their benchmark short-term interest rates would remain near zero. Even so, trees-don't-growth-to-the-sky and investors' appetite for any class of asset eventually wanes.
In the world of single-family mortgages fixed income investors, those that buy assets like longer-dated Treasury debt obligations and mortgage-backed securities, by necessity live in the future - not the present. The radars for these "guys" are focused six months or more into the future and their trades are driven largely by the perception of "what-will-be" - rather than shorter-term (day or days) traders who focus more simply on "what is". It is this very distinctive difference between trading styles that can/will create an environment of rising mortgage interest rates in a period of time when near-term macro-economic reports suggest rates should be trending steady to lower.
A well bid 10-year note auction tomorrow and solid demand for Thursday's 30-year bond offering will be viewed by many as a solid indication that fixed-income investors see no looming threat of inflation anywhere on the horizon - which by extension - suggests these investors believe economic growth will once again begin to wane in 2010. The good news here is that mortgage interest rates will almost certainly continue to hover within a whisper of historic lows while the bad news is that the demand for mortgage financing will likely continue to contract as joblessness rises and the consumer develops a "bunker mentality" with respect to spending of any sort.
On the other hand, if the Treasury's 10-year note and 30-year bond offering result in higher yields for both of these instruments, fixed-income investors will be putting their-money-where-their-mouth-is with respect to their belief the sustained economic growth will prevail -- which will in-turn lead to an increase in employment opportunities followed by a notable increase in mortgage demand. Granted, if this scenario develops it will set the stage for a slow but progressive move to higher mortgage interest rates - which may actually prove to be a "good thing".
As mentioned in this space before, there are an increasing number of reasons to think we've reached a point in the economic cycle where a modest uptick in mortgage interest rates created by accelerating economic growth will actually create a better market place for mortgage originators -- than a economic backdrop that supports yet lower mortgage interest rates could ever come close to generating.
Monday, October 5, 2009
Monday, October 5, 2009
Uncle Sam has plans to borrow $78 billion this week. He will start things off with $7 billion of 10-year inflation-indexed securities today followed by $39 billion of 3-year notes tomorrow, $20 billion of 10-year notes on Wednesday and he will wrap things up on Thursday with a $12 billion offering of 30-year bonds. Demand has been solid at previous government debt auctions. Keep your fingers crossed that this week's supply is easily absorbed. If investors get a case of indigestion trying to swallow this mammoth amount of supply -- the upward pressure on mortgage interest rates will increase substantially.
The incoming macro-economic news is sparse this week. Investors took just a moment this morning to grant the September Institute of Supply Management service sector report a passing glance. This measure of activity in the largest sector of the economy rose to 50.9% in September - a nice improvement from 48.4 in August and noticeably above the consensus forecast for a reading of 50.0. The service sector represents about 80% of domestic economic activity, including businesses such as banks, mortgage companies, airlines, hotels and restaurants. The prices paid component of the index fell to 48.8 in September from 63.1 in August - highlighting the fact current inflation pressures are essentially nonexistent. The employment component of the index rose to its highest level since August 2008 - registering a reading of 44.3 from 43.5 in August. Melted down to its bare essence -- the September Institute of Supply Management service sector report is consistent with market participants' current glass-half-full view of the economy. No big whoop.
The "adjustable" feature of today's 10-year inflation-indexed notes the government will be peddling should make them very attractive to domestic and foreign investors alike. If this assessment proves accurate, today's auction will not exert much, if any influence on the current trend trajectory of mortgage interest rates.
The incoming macro-economic news is sparse this week. Investors took just a moment this morning to grant the September Institute of Supply Management service sector report a passing glance. This measure of activity in the largest sector of the economy rose to 50.9% in September - a nice improvement from 48.4 in August and noticeably above the consensus forecast for a reading of 50.0. The service sector represents about 80% of domestic economic activity, including businesses such as banks, mortgage companies, airlines, hotels and restaurants. The prices paid component of the index fell to 48.8 in September from 63.1 in August - highlighting the fact current inflation pressures are essentially nonexistent. The employment component of the index rose to its highest level since August 2008 - registering a reading of 44.3 from 43.5 in August. Melted down to its bare essence -- the September Institute of Supply Management service sector report is consistent with market participants' current glass-half-full view of the economy. No big whoop.
The "adjustable" feature of today's 10-year inflation-indexed notes the government will be peddling should make them very attractive to domestic and foreign investors alike. If this assessment proves accurate, today's auction will not exert much, if any influence on the current trend trajectory of mortgage interest rates.
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