Friday Morning ........................................ 2/15/08
NO LOVE FOR MBS'S!
As you know yesterday was one of the worst
days for mortgage backed securities we've had in a while. No one wants
to buy and everyone wants to sell. Volume was EXTREMELY LOW! Demand
was EXTREMELY LOW! So according to Econ 101, when demand is low,
sellers lower prices to entice buyers. The lower the price, the higher
the yield, thus the higher the mortgage rate.
Inflation seems
(again, and as always) to be the looming concern driving the fear of
bonds right now. As the likelihood that FED rate cuts will be more and
more aggressive, the inflation hawks start squawking (and with good
reason). Data and sentiment indicate inflation is a justifiable
concern. Why are bonds afraid of inflation? Because bonds return a
fixed income for investors that buy them. The more inflated the
dollar, the less valuable the bond. At any rate (no pun intended),
this is a fantastic point with which to educate yourself and share with
everyone you know. It's really important for mortgage brokers and
consumers to understand that FED RATE CUTS DO NOT EQUAL MORTGAGE RATE
CUTS. Aggressive cuts usually hurt mortgage rates for the reasons
noted above.
Most of he data is certainly on our side:
1.
Empire State Manufacturing Survey: This index tracks general business
conditions and was forecast at 5.75 today, but only achieved a reading
of -11.7. Weak manufacturing sector = weak economy = weak stocks =
strong bonds = better rates (normally)
2. Jobs Data from yesterday was weaker than expected
3.
Industrial output today failed to make a significant gain , and was
only positive because of the extremely high prices of utilities and
energy combined with inelastic demand. In other words, this report hit
expectations today, but without the data skewing factors, it would have
been down by a significant amount.
4. Consumer Sentiment Continues to plummet. Expected to come
in at a 77.0 level, the Consumer index only achieved a reading of 69.6
All these things would normally be good for mortgage rates, but that
assertion only holds true in a market with restrained inflation and
investor appetites for bonds. In recent weeks, MBSs have received a
deadly one-two punch from decreased appetite for mortgage securities
and the stronger punch of inflation concerns. In data released today,
import prices rose appreciably from a consensus of .5% to a reading of
1.7%. This has direct bearing on inflation.
So despite the
bond friendly data from today and earlier in the week, the inflation
concern and the lack of demand for bonds are pushing rates drastically
higher. Don't expect relief either until inflation indications
diminish. We've seen several days recently where both stocks and bond
prices declined at the same time. This is always bad news for mortgage
rates as it indicates that the normal economic factors are not
affecting bonds.
Even though I hate to recommend a lock when the
market has risen so much, I'm not convinced that economic data alone
can push rates lower in this environment (an environment that has only
really sprung into existence in the last 10 days). When this much
bond-friendly data can hit the market without even making a dent, it's
time to be afraid of the dark horse: inflation. I would be hesitant to
float anything until inflation is in check. To make matters worse, if
we get any positive economic data, it will have an unusually strong
impact.
If you want to roll the dice a bit, you may be OK
floating through the weekend. Next week is extremely light in terms of
data. It could be very volatile. Here's the bottom line: the money
you'd save by floating if the bond yields goes down is insignificant
compared to the money you'll lose if bond yields go up. In other
words, an incorrect lock decision won't hurt as bad as an incorrect
float decision. No one can predict the next 7 days with any measure of
accuracy, so play it safe.