Mortgage investors begin the day dogged by the $63 billion of fresh supply that will be sloshing into the credit market from Uncle Sam over the course of the next three days. The 200+ point surge in stock prices right out of the gate this morning has caused some concern as well.
If major stock markets post solid gains this week the government's auction of $34 billion of 3-year notes today, tomorrow's $18 billion offering of 10-year notes and Thursday's $11 billion of 30-year bonds will likely be poorly bid as investors chase more "bang-for-their-buck" through equity (stock) purchases. Should this scenario develop - look for mortgage interest rates to edge higher as the week progresses. That's the bad news.
The good news is that the Fed still has roughly $310 billion of the original $500 billion it was allocated in January for the direct purchase of mortgage-backed securities. If mortgage interest rates begin to ratchet up too sharply you can bet Fed Chairman Bernanke will instruct his agents to retard this upward movement by entering the mortgage-backed securities market as aggressive buyers. It is worth noting that this strategy was never designed to move mortgage interest rates down to some specified level (remember the 4.0% 30-year fixed-rate rumors). The money the Fed has in its back-pocket is there as a temporary counter-weight to the upward pressure the massive $2 trillion+ of new incoming supply from the Treasury will undeniably exert on mortgage interest rates.
It is still believed among many that by Memorial Day of this year the lowest mortgage interest rates in a generation will likely have come and gone.
Tuesday, March 10, 2009
Monday, March 9, 2009
The economic calendar offers nothing of particular substance. The highlight of the week, from a macro-economic perspective, will be the Commerce Department's release of the February Retail Sales report at 8:30 a.m. ET on Thursday, March 12th. If the Retail Sales figures remain near unchanged from January levels - look for mortgage investors to interpret the data as a slight negative for the prospects of lower mortgage interest rates.
The opinion of most is the February Retail Sales headline figure will have to fall by 1.0% or more while the component of the report that excludes auto sales simultaneously posts a decline of at least 0.4% to induce mortgage investors to nudge mortgage interest rates lower from current levels. While such an outcome is possible - it is not very probable.
As it has been since the first of the year -- the trend trajectory of mortgage interest rates will likely be driven by two counter-weighted forces. On the one hand Uncle Sam's massive appetite for debt will tend to push prices on Treasury obligations lower - creating some upward pressure on mortgage interest rates.
This supply pressure can/will be offset in part or in total by further weakness in the stock markets. Should stocks continue to sell-off -- the bid for Treasury obligations and mortgage-backed securities will improve as surviving capital from the stock market swoon is shepherded into the safest investments available.
From a technical perspective there are an increasing number of indications suggesting the capitulation phase in the current sell-off in the stock markets will possibly be completed before the month is out. If that assessment proves accurate, the prospects for notably lower mortgage rates are growing increasingly dim.
The opinion of most is the February Retail Sales headline figure will have to fall by 1.0% or more while the component of the report that excludes auto sales simultaneously posts a decline of at least 0.4% to induce mortgage investors to nudge mortgage interest rates lower from current levels. While such an outcome is possible - it is not very probable.
As it has been since the first of the year -- the trend trajectory of mortgage interest rates will likely be driven by two counter-weighted forces. On the one hand Uncle Sam's massive appetite for debt will tend to push prices on Treasury obligations lower - creating some upward pressure on mortgage interest rates.
This supply pressure can/will be offset in part or in total by further weakness in the stock markets. Should stocks continue to sell-off -- the bid for Treasury obligations and mortgage-backed securities will improve as surviving capital from the stock market swoon is shepherded into the safest investments available.
From a technical perspective there are an increasing number of indications suggesting the capitulation phase in the current sell-off in the stock markets will possibly be completed before the month is out. If that assessment proves accurate, the prospects for notably lower mortgage rates are growing increasingly dim.
Friday, March 6, 2009
Friday, March 6, 2009
Remember when a massive 651,000 loss in headline nonfarm payrolls and a jump in the nation jobless rate to 8.1% (its highest mark since December 1983) would have spawned a towering rally in the mortgage market highlighted by notably lower mortgage interest rates??
News of the dismal dimensions reported this morning use to send capital screaming out of the equity markets and other macro-economic sensitive investment vehicles into the relative safe haven of Treasury obligations and mortgage-backed securities. But that's all so "old school" now.
Today the fact that "only" 651,000 jobs were "actually" lost in a single month draws nothing more than a disinterested passing glance and a yawn from mortgage investors. Why? Because the "whisper" numbers had mortgage investors bracing for a headline job loss of 800,000 or more. Since the "worst-case" scenario did not develop - many observers think a "relief rally" in the mortgage market might be possible before the day is out. While I would agree such an outcome is possible - I don't think it is very probable.
It is far more likely mortgage investors will spend the balance of the day doing some profit-taking and squaring up positions in front of next week's $63 billion Treasury auction. The unrelenting pressure created in the credit markets by the government's gargantuan appetite for capital will continue to hold ultimate trump over all other conditions and events - making it inescapably difficult for mortgage interest rates to move significantly lower from current levels. That is not to say there won't be days or perhaps even a week or two of improving conditions in the mortgage market - but eventually the law of supply and demand will reign supreme - you know the one I'm talking about - "when supply exceeds demand prices fall." In our world when prices fall - rate rise.
News of the dismal dimensions reported this morning use to send capital screaming out of the equity markets and other macro-economic sensitive investment vehicles into the relative safe haven of Treasury obligations and mortgage-backed securities. But that's all so "old school" now.
Today the fact that "only" 651,000 jobs were "actually" lost in a single month draws nothing more than a disinterested passing glance and a yawn from mortgage investors. Why? Because the "whisper" numbers had mortgage investors bracing for a headline job loss of 800,000 or more. Since the "worst-case" scenario did not develop - many observers think a "relief rally" in the mortgage market might be possible before the day is out. While I would agree such an outcome is possible - I don't think it is very probable.
It is far more likely mortgage investors will spend the balance of the day doing some profit-taking and squaring up positions in front of next week's $63 billion Treasury auction. The unrelenting pressure created in the credit markets by the government's gargantuan appetite for capital will continue to hold ultimate trump over all other conditions and events - making it inescapably difficult for mortgage interest rates to move significantly lower from current levels. That is not to say there won't be days or perhaps even a week or two of improving conditions in the mortgage market - but eventually the law of supply and demand will reign supreme - you know the one I'm talking about - "when supply exceeds demand prices fall." In our world when prices fall - rate rise.
Thursday, March 5, 2009
Thursday, March 5, 1009
In yesterday's commentary I provided a synopsis of the government's Home Affordability and Stability plan. If you are interested in more detailed information see the website www.financialstability.gov.
Today is another day - same old story. The direction of mortgage interest rates is being dictated by trading action in the stock markets. Since Friday, February 20th I have been writing in this space about a stock market plunge and the resulting support for the prospects of steady to fractionally lower mortgage interest rates it would create. In my judgment we are currently in the "sweet-spot" in terms of the amount of support mortgage interest rates can expect as a result of the swoon in global stock markets. Before the month is over I believe the worst of the sell-off in the stock markets will have passed.
As you undoubtedly know, markets are made up of both buyers and sellers. No matter how strong the desire to sell or buy may be - the transaction can not be completed without the opposing party directly participating in the transaction.
The "so what" factor here is extremely important - consider this - once all the sellers have been indentified and satisfied, that only leaves one component in the market place - active and aggressive buyers who suddenly realize they have the opportunity to acquire stocks at the low point in the market cycle. This market dynamic has never failed before and it will not fail this time around.
(An insider's opinion is the stock market as indexed by the Dow will put in a low on or about March 23rd.)
Against this backdrop the Treasury department will be looking to issue a river of $2.5 trillion of debt. Without the "flight-to-quality" support of capital fleeing the volatility of the stock markets for the relative save harbor of the Treasury market - treasury yields will rise and drag mortgage interest rates higher as they go.
The hope is that an increasing number of buyers will come to see the greatest mortgage financing opportunity in a generation is now available.
There is an old Chinese proverb that says, "Ever banquet must come to an end." The same can be said for cycles favoring lower mortgage interest rates.
Today is another day - same old story. The direction of mortgage interest rates is being dictated by trading action in the stock markets. Since Friday, February 20th I have been writing in this space about a stock market plunge and the resulting support for the prospects of steady to fractionally lower mortgage interest rates it would create. In my judgment we are currently in the "sweet-spot" in terms of the amount of support mortgage interest rates can expect as a result of the swoon in global stock markets. Before the month is over I believe the worst of the sell-off in the stock markets will have passed.
As you undoubtedly know, markets are made up of both buyers and sellers. No matter how strong the desire to sell or buy may be - the transaction can not be completed without the opposing party directly participating in the transaction.
The "so what" factor here is extremely important - consider this - once all the sellers have been indentified and satisfied, that only leaves one component in the market place - active and aggressive buyers who suddenly realize they have the opportunity to acquire stocks at the low point in the market cycle. This market dynamic has never failed before and it will not fail this time around.
(An insider's opinion is the stock market as indexed by the Dow will put in a low on or about March 23rd.)
Against this backdrop the Treasury department will be looking to issue a river of $2.5 trillion of debt. Without the "flight-to-quality" support of capital fleeing the volatility of the stock markets for the relative save harbor of the Treasury market - treasury yields will rise and drag mortgage interest rates higher as they go.
The hope is that an increasing number of buyers will come to see the greatest mortgage financing opportunity in a generation is now available.
There is an old Chinese proverb that says, "Ever banquet must come to an end." The same can be said for cycles favoring lower mortgage interest rates.
Wednesday, March 4, 2009
Wednesday, March 4, 2009
The mortgage market is sagging this morning, weighed down as trading activity in the stock markets show flickers of life and as investors brace for an announcement tomorrow of another massive round of Treasury borrowing.
The Treasury Department is expected to announce it plans to sell $33 billion of three-year notes on March 10th, $17 billion of 10-year notes on March 11th and $10 billion of 30-year bonds on March 12th - for an eye-popping total of $60 billion.
The "so what" factor here is that investors haven't yet fully digested the $94 billion they were served last week so appetites for this massive round of new supply may be fairly thin. If this assessment proves accurate, the government will likely find it necessary to "sweeten-the-pot" by offering higher returns on these securities which is a scenario that will almost certainly cause mortgage interest rates to edge higher as well.
The mortgage market is also struggling with President Obama's $275 billion Homeowner Affordability and Stability plan aimed at making refinancing easier for a select group of American homeowners. Here is a synopsis of the homeowner rescue concept:
The plan has three components. The first would help homeowners who are still current on their payments, but who are paying high interest rates and cannot refinance because they do not have enough equity in their homes, a problem afflicting growing numbers of people as housing values tumble.
A second component would assist about four million people who are at risk of losing their homes. It would provide incentives to lenders who alter the terms of loans to make them affordable for the troubled borrowers. (Editorial comment: Where else but in America can you borrow your down payment, take out a first and second lien and still be considered a homeowner.)
A third component would try to increase the credit available for mortgages in general by giving $200 billion of additional financial backing to Fannie Mae and Freddie Mac.
Beyond luring lenders with government money, the plan also calls on Congress to give bankruptcy judges the power to change the terms of mortgages and reduce the monthly payments.
The banking industry has vehemently fought that proposal for more than a year, saying it would make investors unwilling to finance future mortgage lending. But Democrats in Congress strongly support the idea and banking executives are putting up less resistance than before. In my judgment the law of unintended consequences is at play. As I mentioned before, if bankruptcy judges are given unilateral authority to modify an existing mortgage such an event immediately changes the risk profile of the underlying mortgage-backed security.
From a fixed-income investor's perspective -- risk begets rate -- which means future homebuyers will very likely wind-up paying higher interest rates so that a relative few can enjoy lower mortgage interest rates now. I don't know about you - but I personally question the wisdom of granting individuals who misrepresented their income and/or assets on their original mortgage application the benefit of taxpayer assistance now.
For those of you hoping to see refinance volume improve because of this homeowner rescue plan -- I fear you may be disappointed. The $75 billion that will be used to modify existing mortgages will flow through servicers - not originators. That's the bad news. The good news is the $200 billion that is scheduled to be given to Fannie Mae and Freddie Mac with likely find its way into the mortgage market - but at current rates - and through normal channels.
Speaking of production - the Mortgage Bankers of America reported this morning their seasonally adjusted mortgage application index, made up of both purchase and refinance loans, fell 12.6% last week. Refinance applications were down 15.3% for the period while the purchase index slumped 5.6%.
The Treasury Department is expected to announce it plans to sell $33 billion of three-year notes on March 10th, $17 billion of 10-year notes on March 11th and $10 billion of 30-year bonds on March 12th - for an eye-popping total of $60 billion.
The "so what" factor here is that investors haven't yet fully digested the $94 billion they were served last week so appetites for this massive round of new supply may be fairly thin. If this assessment proves accurate, the government will likely find it necessary to "sweeten-the-pot" by offering higher returns on these securities which is a scenario that will almost certainly cause mortgage interest rates to edge higher as well.
The mortgage market is also struggling with President Obama's $275 billion Homeowner Affordability and Stability plan aimed at making refinancing easier for a select group of American homeowners. Here is a synopsis of the homeowner rescue concept:
The plan has three components. The first would help homeowners who are still current on their payments, but who are paying high interest rates and cannot refinance because they do not have enough equity in their homes, a problem afflicting growing numbers of people as housing values tumble.
A second component would assist about four million people who are at risk of losing their homes. It would provide incentives to lenders who alter the terms of loans to make them affordable for the troubled borrowers. (Editorial comment: Where else but in America can you borrow your down payment, take out a first and second lien and still be considered a homeowner.)
A third component would try to increase the credit available for mortgages in general by giving $200 billion of additional financial backing to Fannie Mae and Freddie Mac.
Beyond luring lenders with government money, the plan also calls on Congress to give bankruptcy judges the power to change the terms of mortgages and reduce the monthly payments.
The banking industry has vehemently fought that proposal for more than a year, saying it would make investors unwilling to finance future mortgage lending. But Democrats in Congress strongly support the idea and banking executives are putting up less resistance than before. In my judgment the law of unintended consequences is at play. As I mentioned before, if bankruptcy judges are given unilateral authority to modify an existing mortgage such an event immediately changes the risk profile of the underlying mortgage-backed security.
From a fixed-income investor's perspective -- risk begets rate -- which means future homebuyers will very likely wind-up paying higher interest rates so that a relative few can enjoy lower mortgage interest rates now. I don't know about you - but I personally question the wisdom of granting individuals who misrepresented their income and/or assets on their original mortgage application the benefit of taxpayer assistance now.
For those of you hoping to see refinance volume improve because of this homeowner rescue plan -- I fear you may be disappointed. The $75 billion that will be used to modify existing mortgages will flow through servicers - not originators. That's the bad news. The good news is the $200 billion that is scheduled to be given to Fannie Mae and Freddie Mac with likely find its way into the mortgage market - but at current rates - and through normal channels.
Speaking of production - the Mortgage Bankers of America reported this morning their seasonally adjusted mortgage application index, made up of both purchase and refinance loans, fell 12.6% last week. Refinance applications were down 15.3% for the period while the purchase index slumped 5.6%.
Tuesday, March 3, 2009
Tuesday, March 3, 2009
I'll skip all the rhetoric and cut right to the chase - the direction of mortgage interest rates is currently being directly dictated by trading activity in the stock markets. As stock prices fall - mortgage interest rates edge lower - and as stock prices rally - mortgage interest rates creep higher.
There is no escaping the fact that so far this year mortgage interest rates have been completely unable to sustain a rally to lower levels without significant "flight-to-quality" support of capital fleeing the stock markets in search of a safe harbor. Many opinions are that the DJIA is poised to initiate one more down-leg into the low-6,000's range possibly looking for this price target to potentially be achieved before the end of the month. If that assessment proves accurate, the bottom in the DJIA will likely be completely confirmed by June and before Labor Day stock prices will be engaged in a slow but steady climb to higher levels.
If this forecast is anywhere close to right with these projections (granted, that has yet to be seen) the greatest mortgage financing opportunity in a generation is now available -- to those with enough foresight to recognize it.
There is no escaping the fact that so far this year mortgage interest rates have been completely unable to sustain a rally to lower levels without significant "flight-to-quality" support of capital fleeing the stock markets in search of a safe harbor. Many opinions are that the DJIA is poised to initiate one more down-leg into the low-6,000's range possibly looking for this price target to potentially be achieved before the end of the month. If that assessment proves accurate, the bottom in the DJIA will likely be completely confirmed by June and before Labor Day stock prices will be engaged in a slow but steady climb to higher levels.
If this forecast is anywhere close to right with these projections (granted, that has yet to be seen) the greatest mortgage financing opportunity in a generation is now available -- to those with enough foresight to recognize it.
Monday, March 2, 2009
Monday, March 2, 2009
It is definitely worth noting that so far this year mortgage interest rates have been completely unable to sustain a rally to lower levels without significant "flight-to-quality" support of capital fleeing the stock markets in search of a safe harbor. The trend trajectory of the stock markets in the coming days and weeks will strongly determine the direction of mortgage interest rates.
Should the stock markets continue to sell off hard - look for such an event to be supportive of steady to fractionally lower mortgage rates. On the other hand, should the stock markets mount a sustained move to higher share prices such an event will almost surely push mortgage interest rates higher.
The entire docket of the week's upcoming economic reports will likely take a far backseat to the directional dynamics between stocks and interest rates. Economists and investors have projected lousy data well into the third-quarter of the year. Even Friday's nonfarm payroll report will likely draw nothing more than a passing glance from mortgage investors unless the employment picture proves to be better-than-expected. While such an outcome is possible - it is certainly not very probable.
For what it is worth manufacturing contracted in February for the 13th consecutive month. The Institute of Supply Management factory index rose to a reading of 35.8 last month from the 35.6 in January. The fractional improvement was welcome - but as long as the index remains below 50.0 analysts will consider the manufacturing sector to be in a period of contraction.
The Commerce Department also chimed in this morning with a report that showed spending rebounded 0.6% in January, snapping six months of declines while incomes rose. The surge in spending was attributed to massive discounts offered by retailers looking to reduce high inventory levels. The 0.4% rise in January incomes was almost all a function of cost-of-living adjustments for government employees.
Should the stock markets continue to sell off hard - look for such an event to be supportive of steady to fractionally lower mortgage rates. On the other hand, should the stock markets mount a sustained move to higher share prices such an event will almost surely push mortgage interest rates higher.
The entire docket of the week's upcoming economic reports will likely take a far backseat to the directional dynamics between stocks and interest rates. Economists and investors have projected lousy data well into the third-quarter of the year. Even Friday's nonfarm payroll report will likely draw nothing more than a passing glance from mortgage investors unless the employment picture proves to be better-than-expected. While such an outcome is possible - it is certainly not very probable.
For what it is worth manufacturing contracted in February for the 13th consecutive month. The Institute of Supply Management factory index rose to a reading of 35.8 last month from the 35.6 in January. The fractional improvement was welcome - but as long as the index remains below 50.0 analysts will consider the manufacturing sector to be in a period of contraction.
The Commerce Department also chimed in this morning with a report that showed spending rebounded 0.6% in January, snapping six months of declines while incomes rose. The surge in spending was attributed to massive discounts offered by retailers looking to reduce high inventory levels. The 0.4% rise in January incomes was almost all a function of cost-of-living adjustments for government employees.
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