The economic news of the day drew little more than a passing glance from mortgage investors.
Sales of existing homes unexpectedly fell 2.7% during the month of August. Most analysts had anticipated this metric of activity in the housing sector would post a gain of 2.1% or so. July's sales performance was much stronger than expected -- so even with this month's slight retreat - the pace of August sales was second-highest in 23 months. At least 30% of the August existing home sales gain was directly attributable to the $8,000 tax-credit the government offered first-time home buyers. That program will expire at the end of November - and unless it is extended and/or expanded - mortgage investors see a strong probability that existing home sales will likely experience a marked slow-down before the year is out.
In a separate report, the Labor Department reported that the number of workers filing first-time claims for unemployment benefits fell a surprising 21,000 last week. The number of people still on jobless aid after receiving an initial week of benefits fell by a larger-than-expected 123,000. Part of this decline was likely a result of some workers exhausting their 26 weeks of benefits and falling out of the survey group. The share of unemployed people without a job for at least 27 weeks was 33.3% in August - down from 33.8% in July - but still the most since record keeping began in 1948. In attempt to alleviate some of the strain the House of Representatives voted this week to extend jobless benefits for an additional 13 weeks in states hardest hit by the recession.
Mortgage investors shrugged off this economic data - choosing instead to rely on strong buying from the Fed in the mortgage-backed securities market to provide major support for rates at, or near current levels for a while longer.
Uncle Sam will wrap-up his three-part auction schedule for the week with the sale of $29 million of 7-year notes today. The auction will conclude at 1:00 p.m. ET. Yesterday's 5-year note auction was a bit wobbly - with the yield on the 5-year note creeping a higher than most participants had anticipated. There is a good chance investors were hesitant to buy yesterday's offering aggressively just before the Fed released it latest policy statement -- for fear of getting caught by a surprising twist of strategy from central bankers. As it turned out the Fed did nothing to undermine expectations that they intend to keep their benchmark rates near zero for an extended period of time due to an outlook for subdued inflation pressures and slow economic growth. The seven-year note auction will likely draw solid demand from domestic and foreign investors alike. If so, this event will essentially be "toothless" with respect to its impact on the current trend trajectory of mortgage interest rates.
Thursday, September 24, 2009
Friday, September 18, 2009
Friday, September 18, 2009
There is nothing on the economic calendar for investors to chew on this morning - so trading action in the mortgage market will likely be influenced most by activity in the stock markets and investors' preparations for next week's $112 billion three-part Treasury auctions.
Further improvement in stock prices will tend to serve as a drag on any attempt by mortgage interest rates to move notably lower from current levels. If a much overdo downward correction in the stock markets were to develop -- such an event would very likely support steady to fractionally lower mortgage interest rates as capital flees the riskier assets classes for the relative safe haven of government debt and mortgage-backed securities.
Speaking of government debt - Uncle Sam will be thrashing around in the credit markets looking to borrow $112 billion in the form of 2-, 5- and 7-year notes next week. The bidding activity will begin on Tuesday when $43 billion of 2-year notes go on the block, followed by Wednesday's $40 billion of 5-year notes and concluding with Thursday's $29 billion 7-year note offering. The $112 billion size of the coming week's auction schedule is just below a weekly record set in July, but the auction size for each of the individual maturities are actually at all-time highs.
If recent auctions are any guide, the prospects for next week's batch of sales are pretty good. Last week's streak of 3- and 10-year notes together with a 30-year bond component were surprisingly well bid, a major factor supporting mortgage interest rates a current levels. Most analysts seem to believe the coming weeks $112 billion deluge of government debt will be absorbed with little problem. The carry trade dynamics (a way investors make money by borrowing at short-term low rates and investing in securities that yield more) are still very strong and should play a large part in insuring there will be plenty of aggressive buyers at next week's auction. If that assessment proves accurate, the upcoming Treasury event will likely exert little, if any discernible influence on the level of mortgage interest rates.
Other events that will draw mortgage investors' attention during the coming week include a two-day Fed meeting on Tuesday and Wednesday together with the August Existing and New Home Sales figures on Thursday and Friday.
Further improvement in stock prices will tend to serve as a drag on any attempt by mortgage interest rates to move notably lower from current levels. If a much overdo downward correction in the stock markets were to develop -- such an event would very likely support steady to fractionally lower mortgage interest rates as capital flees the riskier assets classes for the relative safe haven of government debt and mortgage-backed securities.
Speaking of government debt - Uncle Sam will be thrashing around in the credit markets looking to borrow $112 billion in the form of 2-, 5- and 7-year notes next week. The bidding activity will begin on Tuesday when $43 billion of 2-year notes go on the block, followed by Wednesday's $40 billion of 5-year notes and concluding with Thursday's $29 billion 7-year note offering. The $112 billion size of the coming week's auction schedule is just below a weekly record set in July, but the auction size for each of the individual maturities are actually at all-time highs.
If recent auctions are any guide, the prospects for next week's batch of sales are pretty good. Last week's streak of 3- and 10-year notes together with a 30-year bond component were surprisingly well bid, a major factor supporting mortgage interest rates a current levels. Most analysts seem to believe the coming weeks $112 billion deluge of government debt will be absorbed with little problem. The carry trade dynamics (a way investors make money by borrowing at short-term low rates and investing in securities that yield more) are still very strong and should play a large part in insuring there will be plenty of aggressive buyers at next week's auction. If that assessment proves accurate, the upcoming Treasury event will likely exert little, if any discernible influence on the level of mortgage interest rates.
Other events that will draw mortgage investors' attention during the coming week include a two-day Fed meeting on Tuesday and Wednesday together with the August Existing and New Home Sales figures on Thursday and Friday.
Tuesday, September 15, 2009
Tuesday, September 15, 2009
Mortgage interest rates were smacked around pretty good this morning as investors reacted to stronger-than-expected August Retail Sales figures and a slightly stronger read on the core producer price index.
The Commerce Department said total retail sales climbed 2.7% last month, the biggest monthly advance since January 2006, after declining by a revised 0.2% in July. Motor vehicle sales surged 10.6% in August on the back of the government's "cash for clunkers" program, which gave consumers up to $4,000 as an incentive to swap aging gas-guzzlers for new, more fuel efficient models. Early indications are that post "clunker" auto sales are not nearly as strong - surprise, surprise, surprise.
Excluding motor vehicles, sales jumped 1.1% in August after falling 0.5% in July. Drilling down through the data to the component that excludes autos, gasoline and building materials - the retail group the government uses to calculate gross domestic product figures for consumer spending - sales increased 0.7%, after a 0.3% gain in July. Heavy discounting by retailers in ramped up "back-to-school" sales campaigns probably contributed heavily to the August "core" retail sales gain.
The "so what" factor behind all the statistical mumbo-jumbo surrounding the August retail sales report is that it will take several more months of improved retail sales figures before calmer, cooler heads will join the bandwagon of those currently celebrating the return of the consumer - the driving force behind 70% of all domestic economic activity. In the "ankle-bone-is-connected-to-the-shin-bone" format of sustained economic growth -- jobs come before accelerating consumer spending - and the story from the labor market currently remains bleak.
Separately, the Labor Department reported producer prices rose twice as much as expected in August - driven by the biggest surge in gasoline prices in 10-years. Prices paid at the farm and factory gate jumped 1.7% last month but are still 4.3% lower than last year levels. The upside surprise was due to higher than expected inflation for food and energy, as well as a surge in light vehicle prices, which lifted core producer prices 0.2%. Core producer price inflation excluding autos has declined quite steadily over the last year. Given the current excess slack in manufacturing -- overall core inflation is apt to slow again once vehicle inflation cools. That should in turn contribute to low inflation at the consumer level.
For the most part the only thing all the macro-economic chatter is good for is to look backward in an attempt to explain what happened. To successfully manage pipeline interest rate risk it has been my experience the view has to be forward looking. From that perspective it is becoming abundantly clear that in order for the mortgage market to regain the drive toward lower interest rates -- it will likely take a sell-off in the stock market and/or some seriously weak economic data - things the current market environment is woefully short of.
The Commerce Department said total retail sales climbed 2.7% last month, the biggest monthly advance since January 2006, after declining by a revised 0.2% in July. Motor vehicle sales surged 10.6% in August on the back of the government's "cash for clunkers" program, which gave consumers up to $4,000 as an incentive to swap aging gas-guzzlers for new, more fuel efficient models. Early indications are that post "clunker" auto sales are not nearly as strong - surprise, surprise, surprise.
Excluding motor vehicles, sales jumped 1.1% in August after falling 0.5% in July. Drilling down through the data to the component that excludes autos, gasoline and building materials - the retail group the government uses to calculate gross domestic product figures for consumer spending - sales increased 0.7%, after a 0.3% gain in July. Heavy discounting by retailers in ramped up "back-to-school" sales campaigns probably contributed heavily to the August "core" retail sales gain.
The "so what" factor behind all the statistical mumbo-jumbo surrounding the August retail sales report is that it will take several more months of improved retail sales figures before calmer, cooler heads will join the bandwagon of those currently celebrating the return of the consumer - the driving force behind 70% of all domestic economic activity. In the "ankle-bone-is-connected-to-the-shin-bone" format of sustained economic growth -- jobs come before accelerating consumer spending - and the story from the labor market currently remains bleak.
Separately, the Labor Department reported producer prices rose twice as much as expected in August - driven by the biggest surge in gasoline prices in 10-years. Prices paid at the farm and factory gate jumped 1.7% last month but are still 4.3% lower than last year levels. The upside surprise was due to higher than expected inflation for food and energy, as well as a surge in light vehicle prices, which lifted core producer prices 0.2%. Core producer price inflation excluding autos has declined quite steadily over the last year. Given the current excess slack in manufacturing -- overall core inflation is apt to slow again once vehicle inflation cools. That should in turn contribute to low inflation at the consumer level.
For the most part the only thing all the macro-economic chatter is good for is to look backward in an attempt to explain what happened. To successfully manage pipeline interest rate risk it has been my experience the view has to be forward looking. From that perspective it is becoming abundantly clear that in order for the mortgage market to regain the drive toward lower interest rates -- it will likely take a sell-off in the stock market and/or some seriously weak economic data - things the current market environment is woefully short of.
Monday, September 14, 2009
Data due out this week should reinforce the belief that the Fed will not be "under-the-gun" to raise short-term interest rates anytime soon because inflation currently poses no threat to the budding economic recovery.
Economists are looking for a tame 0.1% rise for core producer prices (a value that excludes the volatile food and energy components) on Tuesday followed by an equally benign reading for core consumer prices on Wednesday. If that assessment proves accurate the data will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates. In my judgment, it is worth taking just a minute more to drill down into the "so what" factor attached to the inflation reports a bit further.
Right now, short-term funding costs are at rock-bottom levels - the overnight federal funds rate is floating somewhere near 0.15% and the three-month Libor (London interbank offered rate) is near 0.3%. As I write, the 10-year Treasury note yields 3.3% and the Fannie Mae 30-year 4.5% mortgage-backed security is offering investors a return of something in the neighborhood of 4.15%.
Don't give up and quit reading just yet . here's the important stuff.
You don't have to be a rocket scientist to do the math here - big banks and other major financial institutions can pocket a net 3.0+ to 4.0+% return simply by borrowing short and investing in top quality, longer-dated securities like government debt obligations and mortgage-backed securities. As long as short-term interest rates remain low - the "carry trade" (as this financing structure is commonly known in the credit markets) - will continue to support the prospects of lower mortgage interest rates -- if for no other reason than it is hard for big financial institutions to say no to easy money.
The bad news here is that this same "carry-trade" financing phenomenon sets the government debt and mortgage-backed securities markets up for a painful adjustment when (noticed I didn't say if) Fed policy and the inflation outlook changes. For the time being there seems to be little chance of that happening, given the expectation that the Federal Reserve is projected to keep short-term interest rates extraordinarily low for fear of derailing the emerging economic recovery. Even so, you can take it to the bank that selling pressure in the mortgage market will increase when once the core levels of both the producer and consumer price indexes begin to trend higher. As usual I'll keep you updated on the inflation story as we go forward - but at least now you know why the inflation numbers will take on added significance in the coming months.
For the balance of the day look for mortgage interest rates to take the majority of their directional cues from trading action in the stock markets. Higher stock prices will tend to drag mortgage interest rates higher while falling stock prices will likely be supportive of steady to slightly lower mortgage interest rates.
Economists are looking for a tame 0.1% rise for core producer prices (a value that excludes the volatile food and energy components) on Tuesday followed by an equally benign reading for core consumer prices on Wednesday. If that assessment proves accurate the data will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates. In my judgment, it is worth taking just a minute more to drill down into the "so what" factor attached to the inflation reports a bit further.
Right now, short-term funding costs are at rock-bottom levels - the overnight federal funds rate is floating somewhere near 0.15% and the three-month Libor (London interbank offered rate) is near 0.3%. As I write, the 10-year Treasury note yields 3.3% and the Fannie Mae 30-year 4.5% mortgage-backed security is offering investors a return of something in the neighborhood of 4.15%.
Don't give up and quit reading just yet . here's the important stuff.
You don't have to be a rocket scientist to do the math here - big banks and other major financial institutions can pocket a net 3.0+ to 4.0+% return simply by borrowing short and investing in top quality, longer-dated securities like government debt obligations and mortgage-backed securities. As long as short-term interest rates remain low - the "carry trade" (as this financing structure is commonly known in the credit markets) - will continue to support the prospects of lower mortgage interest rates -- if for no other reason than it is hard for big financial institutions to say no to easy money.
The bad news here is that this same "carry-trade" financing phenomenon sets the government debt and mortgage-backed securities markets up for a painful adjustment when (noticed I didn't say if) Fed policy and the inflation outlook changes. For the time being there seems to be little chance of that happening, given the expectation that the Federal Reserve is projected to keep short-term interest rates extraordinarily low for fear of derailing the emerging economic recovery. Even so, you can take it to the bank that selling pressure in the mortgage market will increase when once the core levels of both the producer and consumer price indexes begin to trend higher. As usual I'll keep you updated on the inflation story as we go forward - but at least now you know why the inflation numbers will take on added significance in the coming months.
For the balance of the day look for mortgage interest rates to take the majority of their directional cues from trading action in the stock markets. Higher stock prices will tend to drag mortgage interest rates higher while falling stock prices will likely be supportive of steady to slightly lower mortgage interest rates.
Friday, August 14, 2009
Friday, August 14, 2009
The mortgage market is experiencing a rally this morning spawned by relief that the record-breaking $75 billion three-part Treasury auction is over and by news from the Labor Department indicating inflation pressures at the consumer level remain near record lows.
The Consumer Price Index, the government's broadest gauge of inflation on
In a separate report the government said industrial production rose 0.5% in July - marking its first monthly increase since December of 2007. Most analysts were quick to discount much of this apparent improvement as a temporary result of the federal "cash-for-clunkers" program. The capacity utilization rate, a guesstimate of how much of the nation's total factory and utility production capabilities are actually being used, rose to 68.5% from June's 68.1%. The June mark for capacity utilization was the lowest since records began in 1967.
This morning's mortgage market friendly news is being shadowed by a growing sense among mortgage investors that until the massive wall of government debt overhanging the credit market is dramatically reduced -- it will be difficult if not impossible for mortgage interest rates to move notably below current levels - no matter what the economic data may say about the state of the economy.
The Fed has been the primary buyer in the mortgage market since the first of the year - purchasing roughly 80% of all new mortgage-backed securities coming to market. For the next couple of months the Fed will likely continue to show a solid buying appetite. As of last week, they have spent about $750 billion of the $1.25 trillion they have allocated for the direct purchase of mortgage-backed securities. In their post-meeting statement following this week's Federal Open Market Committee - Fed. Chairman Bernanke put market participants on notice that once the Fed has spent what money they have to spend - policymakers are unlikely to resurrect this particular program any time soon.
The central bank has slowed their average weekly purchases of mortgage-backed securities from $25 billion to something closer to $12.5 billion to try to get a little more mileage out of the available capital - but eventually other buyers will have to step in and take the Fed's place. I have no doubt that will happen - but the likelihood the replacements will make anywhere near the effort the Fed did to be mortgage market friendly is very small.
Next week will be pretty mild with respect to scheduled economic data. Tuesday's 8:30 a.m. dual release of July Housing Starts and Building Permits figures together with the July Producer Price Index will likely draw little more than a passing glance from mortgage investors. Thursday's 8:30 a.m. ET release of the initial jobless claims figure for the week ended 8/15 and Friday's July Existing Home Sales data won't likely be much of a "barn-burner" either.
Thursday, August 13, 2009
Thursday, August 13, 2009
Yesterday, in their post-meeting statement, the nation's central bankers said they saw reasons to believe economic activity is leveling out. Policymakers added, in almost footnote style, their assessment that sluggish income growth and continued job losses would likely constrain household spending.
Sure enough -- this morning's July Retail Sales figure showed a 0.1% drop in overall sales last month after a 0.8% gain in June. Excluding autos and parts sales -- the overall number posted a 0.6% decline in July after a solid 0.5% improvement in June. Granted, a part of the slump in headline retail sales was created by a retreat of 2.1% in gasoline prices during the month - but the key issue here is that the American consumer has not yet joined the recovery party. Until we see signs of significant and sustainable job market expansion -- most mortgage investors believe that it is probably premature to talk about the sustainability of the current economic recovery.
Speaking of job growth, the Labor Department reported this morning that the number of Americans filing for first-time jobless benefits unexpectedly rose by 4,000 last week, while the number of people still drawing unemployment support dropped by 141,000 to the lowest level since April. The best that can be said of current conditions in the labor sector is that the slope of the decline is not as steep as it was at the first of the year.
Today's rather puny economic news has rekindled anxiety about the vigor/sustainability of an economic recovery - which is causing some market participants to question if it is not time to liquidate riskier assets like stocks and plow those proceeds back into relative "safe-haven investments like government debt obligations and mortgage-backed securities. Against this backdrop the Treasury Department will be conducting the last of this week's three-part debt auctions with the gavel scheduled to fall on today's $15 billion of 30-year bonds at 1:00 p.m. ET. If today's offering is more solidly bid than yesterday's 10-year notes (a reasonable expectation) -- look for the current level of mortgage interest rates to remain unscathed to perhaps fractionally lower before the closing bell sounds. A crummy reception for today's 30-year bonds will almost certainly take a toll on the mortgage market in the form of higher interest rates.
Wednesday, August 12, 2009
Wednesday, August 12, 2009
Trading activity in the mortgage market is exceptionally thin as most investors have elected to take a "wait-and-see" approach with respect to the day's events.
The Treasury Department is conducting a $23 billion 10-year note auction. Yesterday's $37 billion 3-year note auction drew exceptionally solid bids from both domestic and foreign investors -- but that result is certainly no guarantee today's 10-year note offering will be as aggressively bid. Analysts cite persistent concerns that $2 trillion of government debt issuance this year will ultimately ignite inflation; a prospect that combined with signs of a budding economic recovery may require the government to "sweeten the pot" with higher yields on today's 10-year note offering in order to generate the required capital. If so, lousy auction results this afternoon at 1:00 p.m. ET will tend to nudge mortgage interest rates higher.
The Federal Open Market Committee will wrap up a two-day meeting this afternoon at 2:15 p.m. ET with the release of their post-meeting statement. The Fed is broadly expected to leave benchmark interest rates near zero. Policymakers will likely go out of their way to damp down growing anticipation that they are considering raising short-term interest rates in the near future to preemptively head off any inflation threat that might appear as the economy staggers to its feet from the worst recession since the Great Depression. It is highly unlikely the committee will substantially alter the outlook Fed Chairman Bernanke spelled out in July that calls for the economy to stabilize but grow sluggishly in the second half of the year, with persistently high unemployment well into 2010.
From a mortgage investor's perspective the most important part of today's Fed statement will be anything that indicates the central bank will soon end their direct purchase programs for government debt and mortgage-backed securities. There is a good chance policymakers will take this opportunity to lay the groundwork for concluding their direct purchases of $300 billion of various government debt instruments, $1.25 trillion of mortgage-backed securities and $200 billion or so of Fannie Mae and Freddie Mac agency debt. If this assessment proves accurate, the approaching retreat of a "big-checkbook" buyer from the credit markets may cause mortgage investors to shove rates fractionally higher. The Fed's post-meeting statement is expected to be released this afternoon at 2:15 p.m. ET -
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