Today we got the release of 2 key economic reports and they both are disappointing for the economy. First, jobless claims, economists where expecting 580,000 but number came in at 588,000. Continuing claims are at all time record levels at 4.76 million. The next report to come in was Durable orders. Durable orders gives us insight into companies willingness to spend on equipment(items that will last more then 3 years such as autos, computers, etc…) which is a sign of economic growth. Economists where expecting a drop of -2.0% but the number came in worse at -2.6%. Both of these reports are friendly to mortgage backed securities but on the news we have started to sell off. We still have new home sales to be released in about an hour and we have another treasury auction later today of 5 year treasury notes. It appears that the added supply of treasuries, which the government is going to need to fund the huge spending, I mean stimulus, package that passed the house yesterday, are dragging mbs down with them. Since Treasuries and mortgage backed securities are both fixed income investments, they do trend in the same direction. With all the added supply of treasuries, the price is going down which increases the yield or rate of return they pay. Since treasuries carry no risk, they are backed by the full faith of the USA, and with the higher yields that they are paying they are becoming more attractive then buying mbs which have a higher yield but do carry some risk.
Yesterday, after opening higher, mortgage backed securities sold off after the release of the FOMC statement. In the statement, the Fed said that they will continue to support the housing market by buying mbs(we wanted them to say this), they also said that inflation is not a concern(another positive), and lastly they said they are prepared to buy US treasuries(I think this is what hurt us). We were hoping that in this statement they would announce that they will buy US treasuries but they stated they are prepared to purchase longer-term Treasury securities. Once the statement was released, US treasuries sold off big time, which brought mbs with them. This is what I refer to when I say birds of a feather flock together. I touched on this yesterday and will again this morning. Mortgage rates follow mortgage backed securities and not treasuries. So, why would we want the Fed to buy treasuries? Now keep in mind this is in real general terms. We and the government want investors to buy mortgage backed securities. Investors who buy fixed income investments have a couple choices, they can buy treasuries or mortgage backed securities. Treasuries carry no risk, they are guaranteed to be paid on their investment where mbs are not guaranteed so they carry some risk. With the added supply of treasuries on the market, the price moves lower(law of supply and demand) which causes the rate of return they pay to increase. With the higher yields they are paying they are more attractive now then buying a mbs even though they are paying a higher rate of return but again they have risk. So, if the Fed starts to buy longer term treasuries, what will be the result? With another buyer in the market, that can print money, to buy the added supply, it will allow the price to increase which would lower they yield they pay which will then make mbs more attractive.
I will get back to you later if we have a massive sell off, but for now we are down about .25 in discount and yesterday we were also down about .25 in discount. We should see rates about .125% higher today then we saw early yesterday.