Yesterday mortgage backed securities traded sideways for most of the day, then had a little sell off late day to close just a little lower then where they opened. This morning, mbs have managed to crawl their way above yesterdays open and are slightly higher on the day. Lenders rates sheets should be anywhere from .125 to .25 better in discount which should place par interest rates from 4.625% to 5.25% depending on the lender.
We did get the release of some economic reports and so far they have all been positive for fixed income investments such as mortgage backed securities. First, we got the release of the weekly jobless claims. Economist’s where expecting around 590,000, but the number came in much higher at 626,000. The continuing claims figure also came in higher and is at record high of 4.79 million. So, the labor outlook is still not looking good and the monthly non farm payroll report and the unemployment rate comes out tomorrow which will probably show more weakness. Economists are expecting a loss of 500,000 jobs from last month and the unemployment rate to move from 7.2% to 7.5%. With higher unemployment, employers do not have to entice new employees with higher pay, so this is good for mbs. Remember, the biggest enemy to mortgage rates is inflation and if employers have to attract new employees with higher pay, they then pass along the higher expense in the form of higher prices to the end consumer, which is inflation and this is known as wage based inflation. Next, we got the release of Productivity which is the ratio of output to input. A more simplistic definition would be how efficient our labor force is at producing goods and services. Higher productivity allows companies to produce more with the same labor force which keeps wage based inflation in check. Economist’s where expecting a 1.0% increase but the number came in much higher at a 3.2% increase. This is very positive for mbs!! Lastly, we got the release of factory orders. Economist’s where expecting a decline of -3.0% but this also came in worse at -3.9%, another positive for mbs.
Since the release of the economic reports, mortgage backed securities have managed to rally some and are well above yesterdays close. We still seem to be very connected with treasuries, so you can keep an eye on them for an idea of how mbs are doing. The 10yr treasury opened today at a yield of 2.92 but is currently lower at 2.86. Hopefully this trend will continue and bring mbs along for the ride. Early reports from the trading pit shows that volume is very low which should be expected on the day before the big jobs numbers we get tomorrow. As far as economic reports go, the non farm payrolls report is probably the highest impacting report we get on a monthly basis.