Price of mortgage-backed securities progressively moved higher as the day wore on yesterday, after all was said and done loses from the prior day were recovered.   The improvement in price allowed most lenders to reprice for the better by day’s end.  Helping fuel the turnaround was the stock market moving off its highs of the day and benchmark treasury yields moving lower. The 10yr Treasury note closing at a yield of 3.54 after hitting 3.60 earlier in the day.    Most of the fluctuations in financial markets appeared to traders setting themselves up for today: the biggest impacting report of the month, the Employment Situation report.

The U.S. Department of Labor released their monthly Employment Situation report this morning. The Non-farm payrolls report serves as the benchmark barometer for the health of the labor market.  A strong economy is very dependent on a healthy labor market as consumers fuel economic growth. If consumers are without jobs, they are unlikely to spend which stunts economic growth.

Last month’s report came in much better than expectations regarding the number of jobs lost, 345,000 versus economist expectations for a loss of 530,000 jobs.  This morning the opposite occurred as job losses were much higher than expected. In June 467,000 jobs were lost, when only 360,000 were expected!  Last month’s number was however revised slightly better to 322,000. 

The unemployment rate came in slightly lower at 9.5% when expectations called for 9.6%.  Also as part of the employment situation we get a measure on consumer income.  First, the hourly work week declined to a 27 year low of 33.0 hours versus economist expectations for 33.2 hours.  This means that on average, people are working less hours which equates to a smaller pay check which would lead to less consumer spending, bad for the economy.  Lastly, the hourly wages came in lower than expectations at a 0.0% monthly increase against expectations of a .2% increase.  With wages flat, there is no concern of wage based inflation at the moment.  So, people are working less hours and income is flat. Overall this report was bad for stocks, good for bonds, and therefore a positive event for MBS. 

Mitigating somewhat the positive effect of the employment situation report as it relates to fixed income is a better than expected weekly jobless claims.   The U.S. Department of Labor released  weekly jobless claims data which indicated that, in the last week, 614,000 Americans filed for first time unemployment benefits. This was better than the consensus forecast for 619,000 new claims.  Last week’s data was however revised slightly worse from 627,000 to 630,000.  The continuing claims read, which totals the number of Americans that continue to file due to lack of finding a new job, showed a small improvement from last month coming in at 6.702 million from 6.738 million the prior week. 

Following the release of both employment reports, Treasuries and MBS both moved higher in price.   Currently the benchmark 10 year Treasury note has moved to a yield of 3.50 after closing at 3.54 yesterday and "rate sheet influential" MBS coupons are up 6  ticks in price or roughly .25 discount points. As has been the case lately, for MBS to continue to improve they need their bigger brother(treasuries) to continue to move lower in yield.  Unfortunately, AQ and Matt inform me that until the some of the economic unknowns are clarified, it will be tough for mortgage rates to move much lower. 

The last piece of economic data today is Factory Orders which totals the dollar level of new orders for durable and non durable goods.  An increasing trend is a positive sign of economic growth which would benefit stocks at the expense of fixed income.  This report will take a back seat to the other data already released.   April’s report showed a 0.7% increase and expectations for May is a further increase of 1.4%.   With the release, factory orders posted a month over month increase of 1.2% which is the biggest gain since June of 2008. 

If you have been floating your rate, we have crossed a major hurdle this morning but are still in search of direction. This means every economic report ,earnings statement, and headline news will effect financial markets.  The only other scheduled event today is the announcement by the Treasury Department of the amount of treasuries to be auctioned next week.   When our government does not have the cash to pay for spending, they issue treasuries to borrow the money.  Next week the Treasury will auction $37billion 3 year notes, $19billion 10 year notes, $11billion in 30 year bonds, and $8bn in 10 yr TIPS notes.  The added supply will apply pressure on treasuries to move higher in yield. Just remember much of the economic outlook remains unknown, therefore financial markets will be looking for guidance from any source.  This implies markets will be volatile at times.

Early reports from fellow mortgage professionals are indicating that rates are improved from yesterday morning.  The par 30 year fixed rate loan is in the 5.00% to 5.25% range for the best qualified consumers.   If you are still floating your rate, hold off on locking this morning but make sure you check back with the  MBS Commentary blog for updates.  MBS have continued to improve and some lenders may reprice for the better.  However, with a 3 day weekend ahead of us, it is not unusual for lenders to be reluctant to pass along gains as anything can happen over the weekend.

Tomorrow the markets will be closed in observance of the 4^th of July.  My next update will come to you on Monday morning.  I hope everybody has a safe holiday weekend.  Hopefully you will be able to spend time with friends and family at a good ol' American cookout.  I sure am looking forward to that myself. 

Following a rather boring day on Monday, volatility picked up a little yesterday as the second quarter officially ended.  Mortgage backed securities followed treasuries to higher yields.  Most lenders did reprice for the worse increasing consumer borrowing costs by .25 in discount.   So far this morning, the downward pressure on MBS and treasuries continues as the benchmark 10 year note has moved to a yield of 3.59 after closing at 3.47 on Monday.  Though not always in direct relationship, this upward move in treasury yields is leading MBS in the same direction.  We're down .25 in discount so far this AM.  Remember, as PRICE falls, YIELD rises.  The "price" falling means that investors are requiring higher yields (interest rates).  This comparative increase in yield is passed on to you the consumer either in higher rates or higher discount points.

 We do have a busy day of economic reports which will set the stage for the most important monthly report, the Employment Situation, which we get tomorrow ( a day early as markets are closed Friday).   The first report to hit the wires is the weekly Mortgage Bankers' Association Applications index which tracks the weekly change in mortgage applications at banks.  The report has indicated a steep decline in mortgage activity.  First, the purchases index registered a 4.5% decline signaling no improvement in purchase activity and the refinance activity dropped a whopping 30%!  Many think lower mortgage rates are vital to our economic recovery in order to spur home purchases and increase consumer spending capacity through refinancing.  So this report is not the best news for the economy but it isn't a major market mover. 

 We received a couple reports this morning regarding jobs, but these reports take a back seat to tomorrow's Employment Situation.  First out is the Challenger Job-Cut Report which indicated that layoffs at corporations decreased from 111,182 to 74,393, the lowest level since the start of the recession.   The second report on jobs is the ADP Employment report which is similar to the official Employment Situation report we get tomorrow but consists of private payrolls (non government, military, etc...).  Historically, this report has varied greatly from the official report but it's accuracy is improving and investors are starting to give it a little more attention.    Expectations were for ADP to report job losses of 400,000 but the actual report indicated a loss of 473,000 jobs.   Here is a graph from Bloomberg that illustrates the difference between the two reports.

 Next is the ISM Manufacturing index which gives a measure of the strength of the manufacturing segment of our economy.   The Institute of Supply Management surveys more than 300 manufacturers on employment, production, supplier deliveries, and inventories.  Readings above 50 indicate that manufacturing is expanding while readings below 50 indicate contraction.   The last 3 reports have each come in better than the prior month helping to stoke the fires of the optimist who feels the end of the recession is hear and we are on to economic growth.   Last month's report showed an improved reading of 42.8 from April's 40.1 reading.   The consensus for June's report is continued improvement with a 45.0 reading, and the actual report has come in basically in line at 44.8.  

The U.S Department of Commerce has released their monthly report on construction spending which totals the dollar value of new construction activity.  Increasing construction spending would be a positive signal for equities as it would lead to more consumer and business purchases.   This report has a 2 month lag, so today's numbers are for the month of May.  April's report indicated a much better than expected increase in construction spending, improving by 0.8% following March's 0.4% increase.   The release has indicated that construction spending has declined for the month of May by 0.9% which is a larger decline than the expectations of -0.5%.   

The last relevant report we get today is the release of Pending Home Sales by the National Association of Realtors(NAR).  This report shows whether pending home sales are increasing or decreasing.  A pending sale is one in which a contract has been placed on a home but the sale has yet to be completed.   Strong demand for housing is a positive signal for our economy, since a consumer has to feel pretty good about their own financial condition and job security to buy a new home.   In addition, strong demand for housing will lead to increased purchases of appliances, flooring, furniture, etc.... so the stock market prefers to see a increasing trend.  Last month's report indicated a much larger than expected increase of 6.7% leading many to believe that the bottom of housing is near.   It will be interesting to see how the recent increase in mortgage rates has affected this report.  The NAR just released and pending home sales has posted a small increase of 0.1%.  

In what has become a common theme, MBS are continuing to be led by treasuries.  Currently the 10 yr note is trading at 3.58 and MBS are down about .125 in discount.  For MBS to manage any gains today, they will need treasuries to move lower in yield.   If the stock market continues its rally, currently up over 100 points, it will be very difficult for treasuries to gain any momentum. 

With the Employment Situation Report due out tomorrow morning, you might want to consider locking your loan today especially if you are closing in the next week or so.  A better than expected or a "not as bad as it could be" report will apply a lot of pressure on MBS to move lower.  Expectations call for nonfarm payrolls to show a loss of 350,000 and the unemployment rate to hit 9.6%.  If you have some inside information, much like Mr. Meeks obtaining a copy of the Orange crop report,  and you feel the job losses will be greater, than floating could pay off.    

Early reports from fellow mortgage professionals are indicating that the par 30 year fixed rate mortgage has inched higher to a 5.125% to 5.375% range for the best qualified consumers.  In order to qualify for a par interest rate you must have a FICO credit score of 740 or higher, a loan to value of 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee. 

To describe yesterday’s action in a word...boring.  Mortgage backed securities and treasuries both traded in a very tight range.  On the day, MBS stayed in a 6 tick range while the benchmark 10 year note traded between a high yield of 3.50 and a low yield of 3.46.  With the ever so important employment situation report coming out Thursday, I suspect this trend to continue for at least today, but we must remain defensive (per AQ and MGs technical indicators).  MBS have posted some nice gains over the last few days, helping to lower mortgage rates a few basis points.

We do have some economic data hitting today that will affect the flow of money.   To remind readers, the general rule of thumb on economic data is better than expected data is usually good for the stock market while worse than expected data usually benefits MBS and lower mortgage rates.   As an example, let’s say that consumer spending is lower than expected.  With less consumer spending, corporate profits should drop so why would you want to buy a stock in a company if their profit will be dropping?  You typically wouldn’t, so you would sell the stock and move the money into the safe haven of lower yielding fixed income investments such as MBS and treasuries.  This is what we refer to as the flow of money between equities(stocks) and fixed income investments.  But onto the data…

The first piece of data this morning is the S&P/Case Shiller home price index.  This index gives a measure on the increase or decrease in the value of residential real estate.  Many economists have stated that our economy will not be able to recover until home prices stabilize and show signs of improving.   This report has a lag time of 2 months, so today’s report will indicate the monthly change in home prices for April.  Last month’s report indicated that home prices still have not found a bottom and they went further stating in the report that there is no evidence that a recovery in home prices is on the horizon but the rate of decline is easing.   Year over year, last month’s report indicated that home prices in March are down a record 18.7%!  One thing to remember is that many home sales now are foreclosures which exaggerate the downside in price declines.   With the release, the index has indicated that the year over year decline in home prices for April is 18.1% which is a marginal improvement over last month’s read.  Following the release of this slightly better report, MBS and treasuries both fell to their worst levels of the week.  Since housing is a key element to our economic recovery, this report is having a larger impact today than in past times. Here is a look at the city by city breakdown...

 Next comes the release of Chicago PMI which is a survey of business conditions around the Chicago area.   Improving business conditions would be positive for the equities market since improving conditions should lead to higher corporate profits.  Last month’s report came in weaker than expected at 34.9 which indicates a contraction in business conditions and expectations for this month’s report are for a improved reading of 40.0.  With the release, Chicago PMI came in slightly weaker than expected at 39.9 indicating further contraction in the Chicago area.  Readings above 50 indicate expansion while readings below 50 indicate contraction.  Following the release, there was not much reaction.

Our last piece of data today is the Consumer Confidence report.  This report is a survey of 5000 consumers on their attitudes on present economic conditions and their expectations on future conditions.  An optimistic consumer is more likely to spend, while a pessimistic consumer is more likely to save.  Since our economy is driven by consumer spending, MBS tend to benefit with a lower than expected reading.  Last month’s report moved higher for the 2^nd month in a row coming in at 54.9 from 40.8 in April.   Expectations for this month’s report are for continued improvement with a reading of 57.0.   The release has indicated a shift in consumer confidence coming in much lower than expected at 49.3.  Apparently high gas prices and an increasing unemployment rate is having an effect on consumer attitudes.   There has been much talk about green shoots and our economy starting to recover from the current recession.  I would love to hear your opinion on the economy.  If you  were contacted for this survey, what would be your opinion of the present economic conditions and your outlook on the future?

That’s it for economic data but we do have a few Fed governors on the speaking circuit today.  Any time they give a speech, they have the ability to move the markets.  If anything relevant comes from their speeches, we will let you know.

Following the release of all the economic data, MBS and treasuries have both stopped moving lower.  It appears that MBS will continue to take their direction from treasuries, which appear to be taking their leadership from stocks.  The benchmark 10 year note moved to a high yield today of 3.57 but following the release of consumer confidence has turned and is moving lower to currently trade at 3.53 after closing at 3.48 yesterday.  For MBS to continue to move higher, we will need treasuries to continue to move lower in yield. 

Early reports from fellow mortgage professionals are indicating that the par 30 year fixed rate mortgage remains in the 5.0% to 5.25% range for the best qualified consumers. To qualify you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee.  Many readers do email me regarding the range I quote for par rates.  I quote a range as rates do vary from state to state.  States such as Texas where I do loans get the best rates available.  Also, these rates are for conventional loans while jumbo loans have higher mortgage rates.  Check with your loan professional on the conforming limit in your area, in Texas conventional loans go up to $417,000.

If you would like to track the intraday price movements of MBS, check out Mortgage News Daily’s Mortgage Rates page.   You will be hard pressed to find another site that offers free MBS pricing as I only know of one other and their pricing is extremely delayed.  The team at Mortgage News Daily updates pricing about every 15 minutes and you can see the time of the last update on the bottom of the chart.  

Last week was a good week for mortgage backed securities and consumer borrowing costs.  In total MBS, improved by almost 100 basis points which helped to lower mortgage rates by ¼ percent.  Much of the improvement came on the day after the FOMC statement was released.   It appears that after market participants had a day to digest the statement, fixed income (of which MBS and treasuries are a part) became popular again.  Also helping our cause was 3 very successful Treasury auctions as foreign investors  gobbled up over 65% of the total allocation.  Strong foreign demand for our countries debt helps to keep our borrowing costs low. 

In observance of Independence Day, we have a shortened trading week with all markets being closed on Friday.  Today brings us no economic reports to digest, so MBS will be driven by treasuries and money flows once again.   Currently the benchmark 10 year Treasury note is trading at a yield of 3.50 after touching a lower yield of 3.47 earlier this morning.  If treasury yields continue to move lower, MBS prices should go higher which will allow lenders to pass along better rates.   But onto the data for the week.

Tuesday

-           Chicago PMI, which is a survey of businesses that gives market participants a gauge into the strength of business activity around the Chicago area.  Readings above 50 indicate a expanding business sector while readings below 50 indicate a contracting sector.  Recent readings of this report have begun to show some signs of life which has helped stirred the pot  of the recession is over crowd.   April’s report came in much better than expected at 40.1 from 31.4 the prior month which sparked a big rally in equities at the expense of fixed income.  Last month’s report did disappoint coming in at 34.9 and economists surveyed are expecting this month’s report to come in higher at 40.0.  MBS usually benefit from a worse than expected report.

-          Consumer Confidence, which is a survey of 5000 consumers across the country on their attitudes on present economic conditions and their view of future conditions.  Since consumer spending drives our economy, this report is very important to market participants as a optimistic consumer is more likely to spend money while a pessimistic consumer is more likely to save.  Our economy benefits more with spending, so the stock market likes a higher reading while the MBS market prefers a lower reading.   This report like several others has indicated a shift in consumer attitudes which has helped the stock market rally over the last couple months but unfortunately that rally has led to higher mortgage rates.  Last month’s report indicated a sharp move higher for the 2^nd straight month coming in at 54.9 from 40.8 in April.   Economists surveyed are expecting this month’s report to continue to show optimism improving among consumers with a reading of 57.0.  It will be interesting to see if rising gas prices and unemployment has put a damper on confidence.  MBS tend to benefit with a worse than expected reading. 

-          S&P/Case-Shiller home price index which tracks the monthly change in the value of residential real estate in 20 metropolitan regions across our country.  Many economists agree that until home prices stabilize and show signs of improving, it will be extremely difficult for our economy to recover.   Recent reports have continued to show home prices falling but at a slower pace.   There are no expectations released for this report.  Improving home prices would be a positive sign for our economy.  The stock market should rally with any hint of improving or declining  at a slow pace home prices which would probably pull money out of fixed income to spur the rally in stocks.

Wednesday

-          Mortgage Bankers’ Association Index which tracks the increase or decrease in purchase and refinance activity at major lenders.  The recent spike in rates has had a greater impact on the refinance activity but last week’s report showed both  refinance and purchase activity improving.  An increasing trend in purchase applications would be positive for the stock market and negative for MBS.  More home sales would lead to increase buying of furniture, flooring, appliances, etc... which should result in higher corporate profits thus the stock market likes to see an increasing trend.   If you have been contemplating buying a new home, what is keeping you from pulling the trigger?  Do you feel home prices still have to fall further, are you concerned about job security or has the recent rise in mortgage rates put your plans on hold?

-          The Institute for Supply Management’s Manufacturing index (ISM) which is a survey of more than 300 manufacturing firms which gives market participants a read on the strength of the manufacturing sector of our economy.   Just like the Chicago PMI survey, readings above 50 indicate a growing sector while readings below 50 indicate contraction.   This report has also indicated that the worst of the recession is behind us with the last 3 reports all coming in better than  the prior month.  Economists surveyed are expecting further improvement with a  reading of 45.0 following last months’ 42.8.  MBS tend to benefit with a  lower than expected reading.

-          Construction Spending, which is the dollar value of new construction activity for residential and non residential properties.   Last month’s report indicated a unexpected jump in construction spending coming in at a month over month increase of 0.8%.  Economists surveyed are expecting this month’s report to show a -0.5% decline.  The stock market tends to rally with a better than expected reading since higher construction spending would lead to increases in other spending which is good for the overall economy and corporate profits; however the increased spending could lead to higher inflation which is negative for mortgage rates.

-          Pending Home sales which is released by the National Association of Realtors and tracks the monthly increase/decrease in pending home sales.  A pending sale is one in which a contract has been signed but is yet to close.   Last month’s report indicated a sharp increase in pending sales coming in at 90.3 from the prior month’s 84.6 reading which is a month over month increase of 6.7%.  Higher home sales should lead to increase in other consumer buying so the stock market generally benefits with a better reading.

-          ADP national employment report.  This report gives us a private companies reading on the employment situation ahead of the governments report we get tomorrow.  Historically speaking, this report has varied greatly from the official government report but is becoming more accurate.  Since jobs are a key foundation to any economy, investors are starting to pay more attention to this report as a gauge for the official report.

Thursday

-          Employment Situation will be released by the Department of Labor.  We usually receive this report on Friday but due to the shortened week we get it today.  This report gives us a couple pieces of data to digest.  The biggest piece is the nonfarm payrolls which shows how many jobs were lost or created from the prior month.   May’s nonfarm payrolls shocked all by coming in considerably better than expectations at -345,000 when economists’ had expected over 530,000!  Economists are expected June’s numbers to come in close to last month’s at -350,000.  Every month since January, the nonfarm payrolls has continued to show a decreasing trend in the amount of jobs lost helping to stoke the optimistic investor’s belief that the end of the recession is here.  MBS tend to benefit with a worse than expected reading.  Next, we get the official Unemployment rate which is expected to climb to 9.6% from last month’s level of 9.4% which is the highest level we have seen since August 1983.  This report is the single most important  piece of economic data that we receive on a monthly basis. 

-          Jobless claims which totals the number of Americans that filed for first time unemployment benefits for the prior week.   Last week’s report indicated that 627,000 Americans filed for unemployment in the week of June 20 and expectations are for this week’s report to show 619,000 more have filed for unemployment benefits.   An increasing trend of claims suggests a weakening labor market which would result in less consumer spending which is bad for the overall economy.   So, MBS tend to benefit with a higher than expected reading.

-          Factory orders which totals the dollar value of new orders for both durable and non durable goods.  An increasing trend is a signal of growing demand by consumers which would lead to higher sales and higher corporate profits.  The stock market likes for this report to come in higher than expected while the MBS market which prefers slower economic growth tends to benefit with a worse than expected reading.  Economists’ surveyed expect this report to show an increase in factory orders of 1.4% following last month’s 0.7% increase.

-          The Treasury Department will announce the total allotment of treasuries to be auctioned at next week’s auctions.   Up for the bidding will be a new supply of 30 year bonds, 10 year treasury notes and 3 year treasury notes totaling $65billion.   The added supply of debt on the market will apply pressure on treasury yields to move higher which would be negative for MBS pricing.  Higher yields on Treasuries will force MBS to move lower in price increasing their yields and overall mortgage rates.  Last week, the Treasury Department held 3 auctions with each having large demand from overseas investors.  High demand from overseas accounts is a sign of a successful auction and is the reason why treasury yields have been moving lower.  As treasury yields have move lower, it has made MBS look more attractive due to their higher yield thus the rally we have seen over the last few days in mortgage rates.

Early reports from fellow mortgage professionals are indicating that borrowing cost continue to move lower.  The par 30 year fixed rate mortgage is in the 5.0% to 5.25% range for the best qualified consumers.  In order to qualify, you must have a FICO credit score 740 or higher, a loan to value at 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee. 

If you would like to track intraday changes to MBS price,  check out Mortgage News Daily’s Mortgage Rates page. 

If you read the blog yesterday, I stated that we were in need of a rally in treasury yields in order for prices of mortgage backed securities to improve before mortgage rates to could move lower.  Well, that is what happened.  The benchmark 10 year treasury note, after touching on 3.70 resistance in the morning, made a dramatic turnaround and by day’s end before closing near 3.50%.  Helping the cause was the last leg of this week's Treasury auctions. Yesterday the Treasury auctioned $27 billion of 7 yr notes. Indirect bids exceeded 65%, well above average, which was close to the demand record at the 2 and 5 yr note auctions on Tuesday and Wednesday respectively. Just before the auction, the 10yr was trading around 3.66 and MBS were slightly improved. After the auction a rally ensued and by day's end most lenders repriced for the better, unfortunately they were not willing to pass along all the improvements so borrowers and loan officers alike were somewhat disappointed.  In total, MBS improved by 75 basis points which would imply a mortgage rate costing 1 point in the morning would have only cost .25basis points by day’s end (give or take servicing and GSE fees).   To recap yesterday’s action, WOOHOOOO!!!!

This morning began with the Personal Income and Outlays report. This data set measures the increase or decrease in both personal income and spending.   Personal income for May was expected to post an improvement of  0.4%, when the numbers were released they indicated a sharp rise of 1.4%. This better than expected read follows  last month’s revised increase of 0.7%.  This big jump in income is being attributed to  onetime payments under the Obama administration's economic stimulus package, the  American Recovery and Reinvestment Act of 2009.  Many Americans received a check from Uncle Sam which boosted their income.  This report is indicating that consumers are making more money, but will it lead to more spending?  Consumer spending drives our economy and recent reports haven’t shown spending increasing as consumers are taking the additional income and saving the money.  Expectations called for spending to post a 0.3% improvement following last month’s -0.1% and the report came in right on expectations.  As part of this report we get another measure on inflation in the form of the Personal Consumption Expenditure.  This data set measures the price change for goods and services on the consumer level and is the Fed’s favorite gauge for inflation.   As expected, this report indicates the core PCE increased by 0.1% further evidencing that inflation is not a concern as of today.   Year over year, the core PCE index fell to 1.8% following last month’s 1.9% reading which is within the Fed’s comfort zone as they want PCE to stay under 2%.  All in all, this report indicates that consumers are making more money but their spending is not increasing at the same rate.  Where is it all going? Consumers are saving more money! The savings rate reached at 16 year high at 6.9%. This implies consumers are building a safety net in the event the economy has another downturn. Speaking of that...

The University of Michigan’s Consumer Sentiment index was released this morning. This data set surveys 500 households on their  outlook for financial conditions and attitude regarding the economy.  Recent sentiment and confidence reports have indicated that consumers are beginning to believe that the worst is behind us.  Economists surveyed expected this report to post a small increase to 69.7 following last month’s 69.0 reading. When the data was printed most were surprised to see that Consumer Sentiment has improved 1.8 points to 70.8. The 500 houses surveyed are apparently feeling more optimistic about our economy even though gas prices are on the rise and unemployment is  approaching 10%!! (Look at U-6 though which has the rate closer to 16%)

So far today the MBS market has been extremely quiet.  This is due to the big rally yesterday which brought out some profit takers this morning. Helping MBS prices move higher today is the continued down trend of treasury yields, the benchmark 10 year note is trading near 3.50%.  If treasuries can hold this trend or at least remain at current levels, we shouldn’t see a sell off in MBS.

Early reports from fellow mortgage professionals are indicating that rates are improved from yesterday with the par 30 year fixed rate mortgage in the 5% to 5.25% range for the best qualified consumers.   If you are currently floating your mortgage rate, please take into consideration that the rates being offered this morning are the best we have seen in a few weeks.  When rates were in the mid- 4’s, many consumers continued to float thinking rates would go lower and lost out after rates spiked on “Black Wednesday”.  Matt and AQ inform me that we are somewhat at a turning point and things could go either direction. 

Well the big event for the week and month came and went with no reaction.  The FOMC meeting concluded yesterday with the release of their policy statement.  No surprise announcements and the verbiage was little changed from last statement.   Many a mortgage professional was hoping for some announcement that would spark a major rally to get rates back below 5%, but no such announcement was included, after reading there was a feeling of  disappointment due to the lack of housing verbiage.   Maybe the Fed believes that housing can correct with mortgage rates in the mid  5% range which is still incredible, historically speaking.  If you would like to read an excellent analysis of the Fed statement, check out AQ’s blog last night by CLICKING HERE. 

We have some economic data hitting the wires this morning.  First on the slate is jobless claims which totals the number of Americans that filed for first time unemployment benefits for the prior week.  Recent reports have shown an easing in the loss of jobs, but today’s report indicates a sizable increase over expectations.  First time claims for the week of June 20 came in at 627,000 when expectations called for only 613,000.  Last week’s numbers were also revised worse by an additional 4000 claims.  The continuing claims, which totals the number of Americans that continue to file for benefits due to the lack of finding a new job, also moved higher by 29,000 to 6.738 million.  Following the release of this report, mortgage backed securities started to move higher on the day.  As MBS move higher, consumer borrowing costs move lower.

Next came the release of the final revisions to first quarter Gross Domestic Product(GDP).  We receive three reading for GDP.  First is the initial reading, than revised reading and the final reading which we received this morning.    The Commerce Department reported that final first quarter GDP was revised slightly better at a contraction of 5.5%.  Economist’s expectations was for the final reading to be -5.7% matching the revised reading we received last month.   Since this report is showing what happened last quarter, the better than expected number had no impact on the markets.  As part of this report, we get a reading on inflation which once again shows that inflation is not a concern as of today.  The FOMC statement yesterday reiterated that inflation is in check for the foreseeable future but they did add some caution due to the recent run up in oil prices.

Also this morning  Federal Reserve Chairman Ben Bernanke is testifying on Capitol Hill regarding the acquisition of Merrill Lynch by Bank of America.   There is some suspicion  that he forced Bank of America into the acquisition of Merrill against their will and asked that they hold back important information regarding losses at Merrill.   Any time Mr. Bernanke speaks, investors will be paying attention as his words can move the markets.   Any major news items from the testimony will be covered in detail by Matt and AQ.

The final news worthy item today is the last treasury auction.  Today at 1pm eastern, the Treasury Department will auction $27billion in 7 year treasury notes.  The first two auctions of the week were met with very good demand especially by indirect bids.  Indirect bids measure demand from foreign investors which is one of the key factors that determine whether the auction is successful or not. Weak demand can cause treasury yields to move higher which will apply pressure on mortgage rates to follow. 

Early reports from fellow mortgage professionals are indicating that rates are slightly better this morning.  The par 30 year fixed rate mortgage has fallen to the 5.125% to 5.375% range for the best qualified consumers.  In order to qualify you must have a FICO credit score 740 or higher, a loan to value 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee.

Since the release of the jobless numbers which helped MBS to move higher on the day, they are starting to give back the gains.  The direction of MBS will be dictated by the movement of treasuries.  This is clearly evident when comparing on a graph of the two.  In order for MBS to move higher today(as MBS move higher in price, mortgage rates move lower), we need treasuries to move lower in yield.  Currently the benchmark 10 year treasury note is trading at a yield of 3.70 after touching 3.66 earlier this morning.  When treasuries were at the low yield of the day, MBS were at their best levels.  Matt and AQ inform me that 3.70 is a key level to maintain as it is a ceiling of resistance that will hopefully prevent the 10 year treasury note from moving higher.  The auction at 1pm will be very crucial as weak demand will apply a lot of pressure on treasury yields to move higher and maybe through the key 3.70 ceiling.  If we break above that key level, it might be a good sign to lock your loan as we are seeing the best rates of the week today.  If you are currently floating your rate, check in with the MBS Commentary blog.  They will inform you if reprices for the worse are imminent.   

Following Monday’s fairly calm day, mortgage backed securities continued to trade in a holding pattern yesterday.  At the beginning of the session,  mortgage-backs were down as much as 8/32nds but fought back and were up 6/32nds at one point in the day.  By day’s end, MBS closed close to where the day began.  It is very typical for lenders to employ conservative pricing strategies when  MBS prices move lower in the morning, however as MBS prices improve lenders are usually willing to pass along better mortgage rates.  Yesterday, although many lenders published weaker than expected rate sheets, most did reprice for the better by day's end.  To remind readers, as MBS prices move higher, consumer borrowing costs decline. 

The first of three treasury auctions for the week took place yesterday with the Treasury Department auctioning $40 billion 2 year treasury notes.  The results of the auction were quite favorable as foreign investors took home almost 70% of the total offering which is well above average demand.  This is typically a good sign for the fixed income sector, but with the Fed statement waiting in the wings the results of the auction didn’t do much to benefit MBS.

First out this morning is the Mortgage Bankers’ Association Weekly Application Survey.  This is a weekly index that tracks the increase or decrease of mortgage applications at mortgage lenders.  Last week’s report showed a decline as a result of the rapid rise in mortgage rates.  Today’s release showed both the purchase and refinance activity picked up in the week ending June 19^th   up after mortgage rates stabilized and moved slightly lower.

Keep in mind, this reports just tracks applications, not closed loans.  With tighter underwriting standards, lower household incomes, and the home valuation code of conduct  negatively impacting many mortgage transactions, many of these applications may not turn into closed loans.

The U.S Department of Commerce released  their report on new orders for durable goods orders this morning. This data set tracks new orders placed with manufacturers for the goods they produce.  Most economic indicators tell us what happened in the past. Durable goods orders tells us what might happen in the future. Specifically the Durable Goods orders provides an indication of what manufacturing production will take place in upcoming months. When interpreting the orders for factory goods, a jump in orders indicates factories will remain busy while a fall in orders indicates contracting production. A persistent decline in factory orders is an omen that assembly lines may soon slow to the point that less labor is needed to fulfill production demand. This can lead to laying off workers and possibly even closing down plants.

Last month’s report showed a nice rebound from March’s  2.2% decline with a  revised reading of 1.8% for April.  Economists were expecting May’s report to show a decline of -0.5% but the numbers came in substantially better at an increase of 1.8%.  Immediately following the release, MBS sold off but have since regained the loses. Prices are currently holding near opening levels.   To help put this report into some kind of perspective, even though we now have 2 months in a row of improvements, year over year durable goods orders are still down 23.3%. 

The last data set is the monthly new home sales which tracks the increase or decrease of newly constructed homes that have a committed sale.  An increasing trend in new home sales suggests that economic activity will pick up in the retail sector.  When new homes are purchased, the buyer will need appliances, flooring, window treatments, etc…  So an increasing trend is positive for stocks and negative for MBS.   April’s report showed a small improvement over the prior month’s decline coming in at an annualized pace of 352,000.  Economists surveyed are expecting continued improvement with a  consensus forecast of 365,000.  At the height of the housing boom, 2006, new home sales were on an annualized pace of 1.1 million.  The report has indicated that new home sales for May came in much lower than expected at 342,000.  Last month’s numbers were also revised lower to an annualized pace of 344,000.  The Fed has stated that housing needs to correct before our economy can truly recover.  This report as well as yesterday’s existing home sales report are not showing signs of improvement with housing.  There are 2 variables in play here,  rising mortgage rates and the home valuation code of conduct which are both negatively impacting consumer home buying.

At 1pm eastern, the Treasury Department will auction $37billion in 5 year treasury notes.  With the fed statement due out after the auction, it will be interesting to see the demand from market participants as many will not want to take a position prior to the release.  Furthermore, Treasuries have made modest gains this week and have not done much to set up for today's auction so there is a possibility that Treasuries weaken leading up to the issuance, which would likely put selling pressure on MBS prices.

The most important event taking place today is the Fed statement at 2:15 eastern.  The mortgage industry , which has seen activity drastically slow due to higher mortgage rates, has been anxiously awaiting the Fed's statement as weakness in the housing market persists and has shown no sign of improvment since mortgage rates began to tick up in late May (due to higher benchmark Treasury yields). The MBS Commentary blog will cover this announcement in great detail.  I strongly encourage all readers to check in with Matt and AQ throughout the day especially prior to and after the statement.

Early reports from fellow mortgage professionals are indicating that mortgage rates are very similar to yesterday’s.  This places the par 30 year conventional rate mortgage in the 5.25% to 5.50% range for the best qualified consumers. If you want to follow MBS pricing, check out Mortgage News Daily's Mortgage Rates page. 

Prices of mortgage backed securities(MBS), that help determine mortgage rates, moved a few basis points higher yesterday, albeit  in very light volume with very little volatility.   In  total since Friday, MBS prices have improved by .25 basis point.  Although most lenders remain reserved ahead of tomorrow's 2:15 FOMC announcement, there were a few lenders who passed along better pricing. Leading the way for MBS was a rally in the treasury market. The benchmark 10 year treasury note yield closed down 6 basis points to 3.68. 

Today is the first day of the Federal Open Market Committee’s(FOMC) 2 day meeting which culminates with their statement at 2:15 tomorrow.  Day one is pretty much a non event as market participants only get a glimpse of policy makers parading into the Federal Reserve building in DC.   The Fed is widely expected to keep the Fed fund rate at its current level, therefore the more important aspect of the meeting will be the wording of the statement and any unexpected announcements.    What are your thoughts on what the Fed will say?  Will they announce increased buying of treasuries or MBS?  I suspect that they will not announce any further increases to the already announced levels of treasury and MBS buying, but I do think they will carefully word their statement to let market participants know that they intend to keep the fed funds rate at current levels for the foreseeable future.  Some have speculated that the Fed will start to increase the Fed fund rate by year’s end due to a rebounding economy.  Others, myself included, believe that the economy is not on the road to recovery as weakness in housing persists.   

This morning the National Association of Realtors(NAR) released the Existing Home Sales report.  This data set totals the number of existing homes, which are homes that are not new construction, that have sold on an annualized pace.  April’s report showed a slight improvement coming in at 4.680 million and expectations for May is an increase to 4.85 million.  To give you a perspective of the decline in housing, at the height of the housing boom in 2006, existing home sales was on an annualized pace of 6.70 million.   The release has indicated an improvement but fell short of expectations coming in at 4.77 million which is a 2.4% increase versus estimates of a 2.6% increase.

The chief economists for the NAR, Lawrence Yun, attributed the increase to the $8000 tax credit but he also cautioned that the implementation of the Home Valuation Code of Conduct(HVCC) is negatively impacting the housing recovery.  We totally agree with his opinion on the HVCC which has dramatically changed the process of having one’s home appraised.  The intended purpose of HVCC is to improve the quality of appraisals, but it is having the opposite effect.  What is your opinion of HVCC?  What nightmare stories do you have? 

The big event of the day will be the first of 3 treasury auctions for the week.  At 1pm, the Treasury Department will auction $40billion of 2 year treasury notes.  The added supply will apply pressure on treasury yields to rise to attract buyers.  Whenever we have a treasury auction we look to the demand (and high yield) to gauge the success or failure.  To benefit mortgage rates, we want very strong demand especially from foreign(aka indirect) bidders.     The MBS Commentary blog will have complete coverage of this event with posts prior to and following.

So far this morning, MBS are holding right at closing levels from yesterday.  Early reports from fellow mortgage professionals are indicating the par 30 year fixed rate mortgage to be relatively unchanged from yesterday.  The best qualified consumers should be able to get a 30 year fixed rate mortgage in the 5.25% to 5.50% range.  To qualify, you must have a FICO credit score 740 or higher, a  loan to value at 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee.

 If you would like to track MBS pricing, you can do that on Mortgage News Daily Mortgage Rates page.

Last week ended on a good note with mortgage backed securities(MBS) rallying into the close on Friday.   So far this morning, the upward trend in MBS price(higher price, lower rates) is continuing.  The media attributes the rally to global conflict (Iran almost in a state of rebellion and North Korea is well North Korea) and the World Bank announcing  lowered forecasts of global growth for this year and  next year. AQ and MG say this a function of technical trading biases. Regardless of reasoning,  fundamental or technical, market participants are leaning towards risk averse assets ahead of the high risk FOMC announcement.  Treasuries are posting healthy gains with the benchmark 10 year note moving from a yield of 3.80 on Friday to currently trade at 3.72. MBS are up 10/32 in price and down a few basis points in yield. No matter the activity in secondary markets today, we must remain defensive as market participants are employing day trading strategies ahead of the FOMC meeting, this implies market conditions can change rather quickly...if you need proof of that  look back at last Thursday by clicking HERE.  

The week ahead brings us some economic reports but the 2 biggest events will be the FOMC meeting and treasury auctions.  Today we get no economic reports to move the markets.   Matt and Adam inform me that trading so far is relatively light as investors keep status quo ahead of the FOMC meeting.  This will probably result in a somewhat stable day but the possibility of volatility increasing is high because of the lack of volume being traded in the markets, thus  be on the defensive.

Tuesday

-          The Federal Open Market Committee(FOMC) begins their 2 day conference where they set our country’s monetary policy  and give an outlook on the economy.   The FOMC meets 8 times per year announcing their policy immediately following the end of the conference on the 2^nd day.   We do not expect any announcement regarding increased treasury buying but hopefully they reinforce their commitment to low mortgage rates and keeping the Fed fund rate at present level until next year.  Some market participants are expecting the Fed to increase the Fed fund rate by year’s end which is one of the factors that has contributed to the recent  spike in mortgage rates.  We do not expect that to be the case as inflation is still of no concern at present times.

-          Existing Home Sales will be announced by the National Association of Realtors.  This report totals the number of existing homes, homes which are not new construction, that a sale closed during the prior month.   Expectations are for this report to show continued improvement after April’s 2.9% increase.  Economists surveyed expect this report to show existing home sales to increase from a annualized pace of 4.68million to 4.85 million.   It will be interesting to see if the recent rise in mortgage rates has a negative impact on this report.  A lower than expected number would benefit MBS.

-          The first of 3 treasury auctions with $40billion in 2 year notes being offered to the highest bidder.  Since the supply is already known, the most important aspect will be the demand that is seen.  MBS and treasuries tend to benefit with strong demand especially by foreign or indirect  investors.

Wednesday

-          Mortgage Bankers’ Association Index which tracks the increase or decrease in purchase and refinance activity at major lenders.   The recent spike in rates has dramatically reduced the refinance activity while the purchase index has shown some signs of improving.   An increasing trend of purchase applications would be a positive for the stock market and negative for MBS.  With more home sales, one would expect increased furniture, flooring, appliance, etc… sales thus the reason why the stock market would tend to rally with a better than expected reading.

-          Durable Goods Orders which  reflects new orders placed with manufactures for goods they produce.   Following April’s revised increase in orders of 1.7%(March posted a drop of -2.2%), economists are expecting a decline of -0.5%.  If factory orders are increasing, that suggests a belief that sales will be increasing.  Why order more goods if you do not expect an increase in demand?  So MBS tend to benefit with a lower than expected reading. 

-          New Home Sales which measures the number of newly constructed homes with a contract for sale.   These are not necessarily sales that close only new homes that a contract has been placed.  With tougher underwriting standards many more purchase loans are being denied by lenders.  April’s release showed a slight rebound to an annualized pace of 352,000.    Year over year, that pace is down 34% and to put this number in perspective, at the height of the housing boom during 2006, new home sales where at a annualize pace of well over a million.  Economists surveyed are expecting the increasing trend to continue to an annualized pace of  365,000.

-          The 2^nd treasury auction with $37billion of 5 year notes being offered up to the highest bidder.

-          At 2:15 eastern, the FOMC meeting concludes with the release of their ever so important monetary policy statement.  This will be the highest impacting event of the week.

Thursday

-          Gross Domestic Product(GDP) which is a measure of the aggregate economic activity and covers every sector of our economy.   This is the final reading for Quarter 1  and since it is looking backwards, measuring growth for last quarter, unless far from consensus this should not have a major impact on the markets.  Expectations are for a reading of -5.7%.

-          Weekly jobless claims which measures the number of Americans that filed for first time unemployment insurance.   Also  included within this report is the continuing claims number which totals the number of Americans that continue to file for benefits for lack of finding new employments.  Last week’s report showed signs of improvement on both counts with the continuing claims falling from 6.85 million to 6.687 million which broke it’s streak of record highs going back to January.  Expectations for first time claims are expected to post a slight increase from last week’s 608,000 to 613,000.  MBS tend to benefit with  worse than expected numbers.

-          The last treasury auction for the week with $27billion of 7 year notes going up for the bidding. 

Friday

-          Personal Income and Outlays which gives us a measure of the dollar value of income received and money spent by consumers.  A part of this report is a measure on inflation in the form of the Personal Consumption Expenditure(PCE).   Personal income posted a nice gain last month of 0.5% and expectations are for continued improvement with a 0.4% increase.  If consumers are making more money, that tends to be a sign of future increase in spending so the stock market tends to rally with a better than expected number. Personal outlays are expected to show an increase of 0.3% following last month’s decline of -0.1%.  Since consumer spending drives our economy, MBS tend to benefit with a lower than expected reading.   The PCE index gives us 2 readings, the headline and the core.  The core strips out food and energy from the numbers due to their volatility and is the one that is more closely watched by the Fed.  So far this year, inflation is of no concern and this report is expected to continue to show that with the core expected to show a month over month increase in prices of 0.1% following last month’s 0.3% increase.   A higher than expected read on inflation would be very bad news of MBS as inflation is the mortal enemy to low mortgage rates. 

-          Consumer sentiment which is a survey of 500 households conducted by the University of Michigan’s Consumer Survey Center on their own financial conditions and attitudes about the economy.   An optimistic consumer is more likely to spend while a pessimistic consumer is more likely to save.   This report has shown signs of improvement which has led to the rally in the stock market and the increase in mortgage rates.  Expectations are for a reading of 69.7 following last month’s 69.0.   The stock market generally benefits with a better than expected reading. 

So far this morning, things are shaping up for a decent day.  MBS are up on the day, treasury yields are moving lower and the stock market is posting a triple digit decline.   We are operating under in a low volume environment so volatility remains a possibility ahead of the Fed statement on Wednesday.   With that said, things can change quickly and often for no apparent reason.   If you would like to track MBS price movement, you can do that by clicking on Mortgage News Daily Mortgage Rates page. 

Early reports from fellow mortgage professionals are indicating that the par 30 year fixed rate mortgage has inched lower to 5.25% to 5.50% for the best qualified consumers.   In order to qualify you must have a FICO credit score 740 or higher,  a loan to value at 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee.   For intraday updates and float/lock alerts, click over to the  MBS Commentary blog.

Tough day yesterday for mortgage backed securities and treasuries as both sold off.  During a sell off, the price of the fixed income security moves lower which increases the yield.  In total, MBS moved lower in price by almost a full point which lead to all lenders repricing for the worse with some repricing multiple times.  Better than expected economic data and higher than expected treasury issuance lead to the sell off. 


To recap yesterday, the Philly Fed index was released which gives a measure of the strenght of manufacturing in the Philadelphia area.  Expectations were for an improved reading of -15.0 but the actual release indicated a much better than expected reading of -2.0.  This has restoked the optimisim that the end of the recession is near.  Adding fuel to that fire was a better than expected leading indicators that came in at 1.2% vs expectations of only a 1.0% reading.   Piling on was the annoucement by the Treasury Department that $104billion of  treasuries will be auctioned next week which was slightly higher than the $101billion that was estimated.   So these reports, an improved continuing claims number (i discussed the jobless claims in yesterday's post) and the fact that MBS have been on quite a rally all lead to the rather large sell off.

Today brings us no economic reports to digest.  With the lack of economic data, MBS direction is going to be dictated by the movement of treasuries.  The 10 year treasury note hit a low yield recently of 3.58 but following the sell off, the 10 year closed over 3.80 in yield.  If treasuries continue to move higher in yield, MBS will be forced to follow.

During this recent run up with mortgage rates, many have questioned the silence from the Federal Reserve.  Remember, their intended goal is to keep mortgage rates low untll the housing market corrects.  Of high signifance next week is the FOMC meeting and accompanying statement.   It will be interesting to all market particapants what the Fed has to say and if they state any increases in treasury or MBS buying.  To remind readers, the Fed has stated that they intend to buy up to $300billion in US treasuries and $1.25trillion in MBS.  Some feel that if they announce more treasury buying, that will help to drive treasury yields lower taking MBS yields with them.  Next week should be interesting.

So far this morning, the downward pressure continues on fixed income.  Early reports from fellow mortgage professionals are indicating that the par 30 year fixed rate mortgage is in the 5.375% to 5.625% range for the best qualifed consumers.   If you would like to follow the price movements of MBS, you can CLICK HERE.

What a roller coaster ride we have been on lately. Yesterday mortgage backed securities(MBS) traded way up, then sold off all gains, leaving us just about where we started the day.  After the release of weaker than expected inflation data, MBS went on quite a rally which created quite a bit of optimism in the mortgage community about sub-5% mortgage rates.  However, like we have said a few times during recent rallies, we must remain defensive as things could change quickly.   To see a graph of yesterday's trading action CLICK HERE.

We do have some economic data coming out this morning.  First on the docket, is the weekly jobless claims numbers which totals the number of Americans filing for first time unemployment benefits.  As part of this report, we also get continuing claims  which totals the number of Americans who continue to file for unemployment benefits due to heir inability to secure a new job.  So far, continuing claims have set a new record high recording 19 weeks in a row.  The Labor Department reported that 608,000 people filed for unemployment benefits last week, slightly worse than expectations of 600,000 initial claims.  The prior week's claims were revised slightly worse from 601,000 to 605,000.  The continuing claims posted a notable  improvement, dropping from 6.84 million to 6.687 million, which breaks the streak of printing new record highs.  After the data release, MBS selling intensified and mortgage rates ticked higher in the process.

There are 2 other relevant reports that will not be released until after I am sitting in the jury box.  I will go over these reports tomorrow but here is a precursor.   The Conference Board will release their Leading Indicators index which gives investors a measure on the overall strength of our economy.  Last month's report indicated the first gain in 7 months coming in at 1.0% and economist's expectations for this month is another 1.0% increase.  The stock market should benefit with a higher than expected number, while the MBS market would benefit from a worse reading.  Also out later today is the Philadelphia Fed survey which measures the strength of manufacturing around the Philadelphia region.  Readings above 0 indicate a growing sector while readings below 0 indicate a contracting sector.  Last month's report showed conditions improving coming in at -22.6 from -24.4 the prior month.  Economists surveyed are expecting continued improvement with a reading of -15.0.  MBS should benefit with a worse than expected reading.

Treasury Secretary Tim Geithner will be testifying before the Senate Banking Committee on regulatory reform at 930am, this will be televised on major financial media channels.  President Obama announced sweeping reforms for the finance industry yesterday and  Mr. Geithner will be questioned in detail on the administrations proposal.   Of course, anytime Mr. Geithner speaks, market particapants will be listening intently. 

The last signifacant event today will be the announcement at 11am est of the amount of Treasury notes to be auctioned next week.  It is expected that $101 billion in 2 year notes, 5 year notes and 7 year notes will be auctioned off next week.  With a new supply of debt coming to market, this will apply pressure on treasury yields to move higher in order to attract willing buyers.  As treasury yields rise, that will apply pressure on MBS yields(mortgage rates) to move higher as well.

Thats about it for the day but we must always be aware of headline risk which is a unexpected announcement that moves the markets or changes investor sentiment.  Matt and AQ will keep you posted throughout the day as events warrant, so make sure you check out the MBS Commentary blog.  Rate sheets are not issued as of yet this morning, but if we hold present levels we should see 5.125% to 5.375% as the par interest rate for the best qualified consumers.  The love market particapants have been showing MBS lately has suddenly disappeared, unfortunately this implies mortgage rates are likely to move a few bps higher this morning.

It seems that market particapants have fallen back in love with fixed income.  Mortgage backed securities and treasuries each posted a healthy rally yesterday. MBS improved by another 50 basis points which allowed all lenders to reissue new rate sheets after the gains held through close.  Helping to promote fixed income is changing investor sentiment regarding inflation, demand for US debt, and prospects for economic recovery. 

We did receive 3 pieces of economic data on Tuesday, of which 2 were favorable for MBS.  First out was Housing Starts which came in considerably higher than economists' expectations.  This news would normally help stocks as new home construction leads to higher appliance sales, flooring sales, furniture, etc... But stocks still lost out, suggesting the recent rally may be overbought as some have argued. We also got the monthly Producer Price index which gives a measure on inflation.  This report came in better than expectations reaffirming that inflation is not a concern right now.  Lastly, we got Industrial Production which indicated that manufacturing fell more than expected last month.  Less manufacturing is a sign of less demand which is not good for corporate profits thus equities sell off while fixed income benefits.  

More inflation data hit the tape today in the form of the Consumer Price Index (CPI), which measures a fixed basket of goods at the consumer level.  This came in at .1%, better than the .3% forecast.  The core was in line with estimates coming in at .1%.  The core reading strips out food and energy due to their volatility and is the favored measure on inflation to the Fed.  Ben Bernanke and other Fed officials have sounded no alarms regarding inflation and hopefully that will be supported by this data set.   The report continues to confirm that inflation is not an immediate concern. 

Of lesser signifance is the release of the Mortgage Bankers' Association Purchase applications index which simply gives a measure of whether new loan applications for purchase and refinances are increasing or decreasing.  With the recent run up in mortgage rates, we were expecting a drop and we got it.  The index has just been posted indicating that purchase applications dropped by 3.5% in June while the refinance activity posted a much larger decline of 23%. 

We also have some headline news items.  Federal Reserve Chairman Ben Bernanke and FDIC chair Sheila Bair on tap, giving a speech to the Operation Hope Financial Literacy Summit in Washington.  Any time that he or she speaks, market particapants will be listening closely for any hint at future monetary polcy and their outlook on the economy.  In addition, President Obama will be announcing new reforms for the financial industry.  Matt and AQ will keep you posted on any relavant news items from the conference and the President. 

Due to the priviledge of serving as a juror, I will be sitting in a jury box before the first rate sheet hits my mailbox.  If we can hold current levels, I suspect that most lenders will offer par 30 year fixed rate mortgages in the 5.00% to 5.25% for the best qualified consumers.   So far this morning, things appear to be setting up nicely for another positive day.  Stock markets across Europe are posting declines' our own Dow futures point to a lower opening and inflation is contained for now.  Even though mortgage rates are trending lower, we must remain defensive as sentiment can shift quickly. 

Many consumers missed the last refi wave when rates hit the 4.5% range for a 30 year fixed rate mortgage.  Many of those consumers were under the belief that rates would go lower and lower so they held out instead of taking advantage of what was in front of them.  The talk around the water cooler was rates going to 4%.  If you are still on the sidelines, what rate are you waiting on before you pull the trigger?

If you would like to get intraday updates on what is happening in the MBS market, click over to the MBS Commentary blog.  Matt and AQ post updates throughout the day regarding the movement of MBS and it's affect on mortgage rates. 

As I stated in my blog yesterday, my public duty is calling as I have been selected for jury duty.(Don't you envy me?)  This will require me to do things a little different with my blog.  Instead of waiting until economic data is released to post, I will be forced to post the blog before the data sets.  I will recap the prior day's data, and let you know what other reports are due out and how they may affect the markets.  I highly encourage you to read the MBS Commentary blog throughout the day for updates.  Matt and Adam will keep you updated on what is happening in the markets and how it relates to mortgage rates.  

Mortgage backed securities(MBS) had a strong day yesterday improving in price by .50 basis points.  As MBS improve in price, lenders can offer more attractive mortgage rates.  Helping to spark the rally was a global sell off in equities.  Stock markets around the world sold off resulting in the flow of money leaving equities and moving into the fixed income markets(MBS and treasuries).   By days end, the par 30 year fixed rate mortgage had fallen to 5.125% for the best qualified consumers.   Matt and Adam tell me that technical indicators are pointing to a supportive week for MBS, but we must remain defensive.  If you can recall, on "Black Wednesday"(5/27) mortgage rates increased by 1/2 percent in one day!

Helping to spark the rally was a worse than expected reading on the Empire State Manufacturing survey.  This survey of approximately 175 manufacturing executives from across New York gives investors a gauge into the strength of manufacturing.  The stock market prefers a strong rapidly growing manufacturing base which leads to higher profits while the MBS market prefers slower growth which results in less inflationary pressures.  After a strong improvement with last month's survey(-14.7 to -4.6), economists were expecting continued improvement with a reading of -2.0.  The actual survey came in considerably worse than expectations at -9.4!!  Once this report was released at 8:30am est, the rally in MBS started to pick up momentum.  Check out this GRAPH that Matt posted and you can see how the rally began following this data(time is on bottom axis and MBS price is on verticle axis).  Granted, the global selloff in equites had already begun, so odds were on our side for a postive day for MBS but sure looks like this data helped things along.

Today, the economic data picks up with Producer Price Index(PPI), Housing starts and Industrial Production.  You can read my blog from yesterday by scrolling down or CLICK HERE for an explanation of each of these data sets and their potential impact on mortgage rates. 

Hot off the presses this morning is the release of housing starts.  Last month's report showed that construction of new homes fell 12.8% to an annualized pace of 458,000 which is the lowest pace since 1959!  To put this number into perspective, in January of 2006 the annualized pace was over 2 million units per year!   Economists are expecting this report to show new home starts increasing to an annualized pace of 500,000.  The report has shown a sharp increase in housing starts of 17.2% to an annualized pace of 532,000.  This is positive for stocks and somewhat negative for MBS.

Also out this morning is the Producer Price Index(PPI) which measures inflation on the producer level.  Since inflation is the mortal enemy to mortgage rates, any hint of inflation can cause MBS to sell off increasing consumer borrowing costs.  This report gives 2 readings, the headline and the core.  The core reading strips out food and energy due to their volatility.  Expectations call for the headline PPI to come in at a month over month increase of 0.7% following last month's 0.3% increase.  The expected increase can be attributed to increasing oil prices.  The core reading is expected to show an increase in producer prices of 0.1% matching last month's reading.   The release has shown that both the overall and core reading are lower than expected at a 0.2% increase for the overall and a -0.1% decline for the core rate.  This is positive for MBS. 

Lenders did not pass along all the improvements from yesterday. Today, the most aggressive lenders should be offering 5.125% to 5.375% as the par 30 year fixed mortgage rate for the best qualified consumers.  In order to qualify, you must have a FICO credit score 740 or higher, a loan to value of 80% or less and pay all closing costs including one point loan origination/discount/broker fee.  As always, you can elect to pay less in fees and accept a higher interest rate.  This option is best suited for a homeowner not planning on keeping their home for more than 3 years.

After two weeks of steadily increasing mortgage rates, from the mid 4's to the mid 5's, volatility in the mortgage market has show signs of stabilization. Last week mortgage rates topped out near 5.625% before a late week MBS market improvement allowed lenders to lower the par 30 year conventional fixed mortgage rate closer to 5.25%. This week begins with MBS trends continuing to indicateg that mortgage borroworing costs should continue to moderate.

For new readers and as a reminder for long standing rate watchers, the foundation for how mortgage rates are generated is built upon trading in the secondary mortgage market, specifically mortgage backed securities(MBS).  If investor demand for MBS is high, prices are generally moving higher which helps mortgage rates tick lower.   If investor demand is weak for MBS, that drives prices lower, which increases mortgage rates.   Investor demand is determined by their perception of the overall economy and the gyrations for the yield curve.  If investors believe the economy is strong and growing, they tend to move their funds into higher yielding stocks as a growing economy tends to lead to higher corporate profits and higher returns for their investment dollar.  When our economy is struggling, investors tend to move their money into safer lower yielding investments such as MBS and treasuries to avoid losing money by holding stocks.  During a struggling economy, corporate profits tend to decrease or disapppear thus the flight into safer assets.  Investors make their investment decisions based on many factors including economic reports which are released almost on a daily basis. (Read More: HOW ARE MORTGAGE RATES DETERMINED?)

This week the marketplace will be focusing on data and headline news from Capitol Hill (as opposed to Treasury auctions like last week). Let's see what's scheduled to move money this week...

Monday
Empire State Manufacturing Survey which is a monthly survey conducted by the New York Fed that gives investors a gauge into the strenght of manufacturing in the New York Area.  A strong manufacturing sector is a key indicator of a growing economy since manufacturing will only pick up if consumer demand is strengthening.   Readings below 0 indicate a contracting sector while readings above 0 indicate a expanding economic sector.   A big factor that has contributed to the recent run up in mortgage rates is the belief that the end of the recession is near (on top of technical trading strategies).  Last month, this report helped to contribute to that belief coming in much better than the prior month moving from -14.7 in April to -4.6 in May.   Even though this report continues to show a weak sector, it is indicating an economy that is stabilizing.   Economist's surveyed are expecting a read of -2.0.  MBS tend to improve with a worse than expected reading.

Tuesday
Housing Starts which measures the number of homes that initial construction has begun.   April's report indicated that housing starts fell almost 13% to an annual pace of 458,000 units.  This is the lowest reading since 1959.  Economists surveyed are expecting this report to indicate that housing starts are improving to an annualized pace of 500,000.

Producer Price Index(PPI) measures inflation on the producer level.   If producers have to pay more for the materials needed to produce goods, they either have to increase their price points (inflation) to make up for the increased costs or absorb the cost which results in lower profits.   This report is not as important as the consumer inflation report we get on Wednesday, but any hint of increasing inflation usually causes MBS to sell off leading to rising mortgage rates. In April this  report indicated that producer prices increased 0.3% following March's drop of 1.2%.  When excluding food and energy, there was only a 0.1% rise last month.  Economist's surveyed estimate the May report will indicate a 0.7% rise in the overall PPI print and 0.1% in the core number.  Currently the Fed has very little concern regarding inflation.

Industrial Production measures the physical output of our country's factories, mines and utilities.  If industrial production is on the rise, that is a sign of a growing economy. MBS tend to improve with a worse than expected reading.  Following last months reading of -0.5%, economists are expecting this report to show continued weakness with a -1.0% reading.

Wednesday
Mortgage Bankers' Association Applications Index which tracks the number of purchase and refinance applications at mortgage lenders.  This report helps investors gauge if housing activity is trending higher or lower.  Higher demand in housing is generally seen as a positive economic indicator since you would have to feel pretty confident in your own personal finances and the current state of the economy to buy a new home. \

Consumer Price Index(CPI) measures inflation at the consumer level.  Since inflation is the biggest enemy of mortgage rates (fixed income), any hint of inflation can lead to higher mortgage rates.  So far this year, there has not been any signs of inflation besides the recent spike in oil prices.  Overall consumer inflation in April came in flat at 0.0% and economists surveyed are expecting May's report to show a month over month increase of 0.3%.  When excuding food and energy, the core reading, economists are expecting a 0.1% increase following last months 0.3% rise.

Thursday
Weekly jobless claims tracks the number of Americans that file for first time unemployment benefits.  Expectations call for 610,000 first time claims following last weeks better than expected read of 601,000 new claims.  Recent jobs reports are indicating a stabilization in the labor market which could be an indicator of an economy that has bottomed out, looking to recover.  Even though the number of jobs lost and first time claims are indicating a slower pace of jobs loss, the continuing claims which totals the number of Americans that continue to file for lack of finding a new job, did set a new record last week at 6.816 million.  MBS tend to beneft with a higher than expected reading.

Leading Indicators measures the overall strength of the economy.  Last month's report indicated the first gain in 7 months coming in at 1.0%.  Economists surveyed are expecting another 1.0% reading for May.

Philadelphia Fed Survey  gives investors a gauge into the strenght of manufacturing in the Philadelphia area.  Readings below 0 indicate a contracting sector while readings above 0 indicate a growing sector. This index has shown signs of improvement in recent months and economist's are expecting that trend to continue.  Last month's report moved higher from -24.4 to -22.6 and expectations call for a -15.0 for this report.  Last month's report was the best reading since September 2008! 

On Thursday we  find out today the amount of treasury notes that will be auctioned at the next Treasury auction.  It is expected that about $101 billion in 2 year notes, 5 year notes, and 7 year notes will be offered.  The added supply of debt available will apply pressure on Treasury yields to rise which also pressures mortgage rates to rise.

That is it for the week as far as economic reports.   We do have some Fed speak this week highlighted by Federal Reserve Chairman Ben Bernanke and FDIC Chair Sheila Bair speaking at Operation Hope Financial Literacy Summit in Washington on Wednesday.  Any time Bernanke and Bair speak, investors will be listening to any hint at future monetary policy and their outlook on the economy.  Their words can have an effect on the markets. Furthermore the Obama Administration is expected to outline sweeping reforms of the financial industry, so stayed tuned into Capitol Hill this week.

My public duty calls me today.  I have been summoned for jury duty so I will not be able to provide my customary rate quotes.   We should see par 30 year fixed rate mortgages in the 5.125% to 5.375% range for the best qualified consumers.

If you are currently deciding whether you should lock or float, click over to the MBS Commentary blog.  MG and AQ will provide multiple updates throughout the day regarding the movement of MBS.  They will also go indepth on what is driving the markets.

Following the completion of the Treasury Department's most recent fundraising event (all three auctions done),  mortgage backed securities rode a rally wave towards lower mortgage rates yesterday.  The rally across the yield curve yesterday helped MBS prices move marketedly higher in price and lower in yield, allowing lenders to pass along improved mortgage rates. Many lenders repriced several times and by days end, borrowing costs decreased by .625 in discount points which lowered the par interest rate on conventional 30 year fixed mortgages by 0.125%. 

Enough about yesterday, lets see what is going to move the markets today.  First out this morning is a report that gives us a measure on inflation.  Import and Export prices was released and came in pretty much in line with economists expectations.  Import prices, the price of items that we import into the country, posted a month over month increase of  1.3% following last months increase of 1.6%.  However, year over year, prices for products we import are still down 17.6%.  Export prices, the price of products we send to other countries also posted a month over month increase of 0.6% following last months 0.5% rise.  Year over year, export prices are still down 6.5%. Following the release, not much reaction to this report but we do get more inflation reports next week which are much more closely watched, the producer price index and the consumer price index.  Any hint of inflation will apply pressure on mortgage rates to move higher. 

The only other piece of economic data today is Consumer Sentiment.  This is a survey of 500 households each month on their own personal financial outlook and attitude about the economy.  An optimistic consumer is more likely to spend while a pessimistic consumer is more likely to save.  One factor contributing to the recent optimism that the worst is behind us is consumer confidence.  It has posted some nice gains recently and since consumer spending accounts for 2/3rds of our economy, investors have grasped to this report and others as a sign to move money away from fixed income, MBS and Treasuries, over to equities for their higher yield.  Economist's suveyed expected this report to continue to show optimism with an expected reading of 69.5, the actual reading came in slighly lower at 69.0.  This is an improvment from the prior month's reading of 68.7, but maybe higher gasoline prices is starting to impact the consumer.  How are higher gasoline prices affecting you and your opinion on the economy?

So far this morning, MBS continue to move higher.  Early reports from fellow mortgage professionals are indicating that rates have moved about a .25% lower from yesterday.   This places the par 30 year fixed rate mortgage in the 5.25% to 5.625% range for the best qualified consumers. 

Float or lock?  Tough call, we have had a nice improvement over the last 2 days.  If you are closing in the near term, you might want to lock and take advantage of the recent improvement.  Longer term closings, might be safe for floating but you must evaluate at the end of each day.  Always remember, rates move higher much quicker than they move lower.  The most important question to ask yourself when debating this issue, "What would hurt you the most, locking and rates move lower, or floating and rates move higher?".  Your answer to that question should help you decide your stance on lock/float.  Looking deeper into the financial markets, AQ and MG tell me the MBS market remains very volatile and susceptible to a selloff as short term trading strategies moderate long term momentum.

On a side note, my apologies to any Yankee fan that might be upset about the drubbing placed upon their team this entire year by the Red Sox.  There can only be one first place team. :-D