Yesterday mortgage backed securities managed to have a late day rally. Most lenders repriced for the better but they did not pass along all the improvements. We should see rate sheets better by .25 to .375% in discount making par 30 year fixed rate mortgages anywhere from 4.625% to 5%. There are no big economic reports to be released today but there are some significant items to discuss.
First, Tim Geithner will be speaking at 11am eastern. He is the newly appointed Secretary of Treasury who is in charge of the banking resue and today he is announcing his game plan on easing the credit markets. All ears will be listening to him and what he says can and will have an impact on all markets. Next, we also have a couple treasury auctions as the government needs to borrow money to fund the spending/stimulus bill. The added supply of treasuries could place pressure on mbs to move lower in price. Remember the law of supply and demand. With more supply of treasuries on the market, prices tend to move lower which increases the yield they pay the end investor. Since treasuries and mortgage backed securities are both fixed income investment, they do tend to trend in the same direction so the added supply might put pressure on mbs to move lower in price which would cause mortgage rates to increase.
What is a mortgage backed security? Well, when you get a new mortgage, your mortgage is bundled together with many other similar mortgages. This pool of mortgages is securitized and turned into a bond known as a mortgage backed security. This bond, mbs, is then sold to investors and based on the price they pay for this bond is what determines mortgage rates. This is the reason why we track the movements of mbs and as the price of mbs moves higher, mortgage rates move lower and vice versa. So, anytime you hear me speak of mbs moving higher that means mortgage rates are moving lower. Many consumers are under the false impression that mortgage rates are set by treasury yields, which is false. Mortgage backed securities and treasuries are similar in that they are both fixed income investments thus they tend to move in similar directions just like precious metals tend to move in the same direction or airline stocks tend to move in the same direction. However, there are many instances of them moving in opposite directions.
So far this morning, mbs have continued to move higher which will hopefully allow lenders to pass along lower mortgage rates. Early reports show that some lenders are pricing more aggressively today.