Mortgage backed securities (MBS) moved above their recent range following a successful 10 year Treasury note auction yesterday.   To remind the readers and for any new rate watchers, mortgage rates are generated by trading in MBS market.  As investors buy MBS, prices moves higher which helps mortgage rates move lower.   Yesterday, higher MBS price levels helped lower consumer borrowing costs by about .125 in discount; unfortunately this morning MBS gains have evaporated and lender rate sheets reflect it. Although par 30 year conventional rate mortgages remain in the 4.625% to 4.875% range for well qualified consumers,  borrowing costs are .125 discount points higher as rate sheet yield spread has diminished.

Let’s dive into the economic data of the day. Generally speaking, positive economic data usually leads to a rally in the stock market.  As a result, investors sell lower yielding less risky assets such as MBS and treasuries in favor of higher yielding stocks.   Negative economic data usually spurs a rally in fixed income market which includes MBS and treasuries.  Investors sell stocks and move their money to the safe haven of fixed income assets. 

Every Thursday we get the release of jobless claims. This data is a report of the number of US citizens who have filed a first time claim unemployment insurance in the prior week.  The Department of Labor reported that 601,000 people filed for unemployment in the past week. This is much better than economists’ expectations for 635,000 new claims.   Continuing claims, which reports the number of people who continue to file for unemployment benefits, rose for the 14^th straight week and set another new record at 6.351 million people.  So the number of layoffs are leveling out; however, the supply of jobless workers is making it increasingly more difficult to find employment.

The Bureau of Labor Statistics released their quarterly report on Productivity and Costs.   Productivity, which is defined as the ratio of output to input and lets investors know how efficient companies are at producing goods and services.  Higher productivity will allow companies to produce more goods and services with the same workforce, higher productivity  keeps production costs low and wards off wage based inflation.   Expectations were for this report to show a flat (0.0%) change from last quarter, surprisingly the actual data indicated a 0.8% increase in productivity.  Labor costs also came in better than expected with a 3.3% rise instead of the expected 3.4% increase.   So, this report  shows that business’s labor costs are being held in check, while their labor force is producing goods at a greater pace which will allow them to post higher profits (because of lower marginal costs) once the economy starts to improve.   

Federal Reserve Chairman Ben Bernanke spoke vie video before the Chicago Fed’s Conference Board this morning. The topic of discussion: Bank Structure and Competition.  Some of the questions being posed relate to the bank stress tests conducted by the Treasury Department.  The results of some of these tests have been leaked but the official report is being released later today at 5pm eastern.  Read More about Bernanke's Speech

Other than headline news items, the last significant event today is another round of treasury auctions.  At 1pm eastern time, the US Treasury Department will be auctioning off $14 billion 30 year Treasury Bonds.  As always, the added supply of debt on the market can apply pressure on both treasury yields and mortgage rates to move higher.  The amount of each auction is known well in advance so the more important aspect is the demand at these auctions especially by indirect/foreign investors.  Yesterday’s 10 year treasury note auction and Tuesday’s 3 year treasury note auction both saw above average demand and above average demand from indirect bids which is what we hope for to help keep mortgage rates low.

Tomorrow we do get the big piece of chicken in the form of nonfarm payrolls.  This report is the single most important piece of economic data and it can have a major impact on all markets.  If this report comes in better than expectations, we could see a rapid decline in MBS price which will move mortgage rates higher.   Expectations are for this report to show a loss of 630,000 jobs from last month and an increase to the unemployment rate from the current 8.5% rate to 8.9%.  I will cover this report tomorrow once it is released at 8:30am eastern time.  If you are currently floating your rate and closing within the next 30 days, you might want to consider locking your rate ahead of this report especially if you think the employment situation report comes in better than expectations.

Early reports from fellow mortgage professionals are showing lender’s rate sheets to be slightly worse than yesterdays by about .2 in discount.   That means if a rate was costing 1 point yesterday, it will now cost 1.2 points.    The day is still young and plenty of time for the markets to change course.  The stock market opened higher this morning but since has turned and is currently lower on some profit taking.  MBS are moving off the lows of the day, but not near any level to prompt a reprice for the better from lenders.    If you are planning on locking your rate today ahead of the employment situation report, you might want to wait until later in the day.  Most lenders have already released rate sheets and when they did, MBS were at the lows of the day.  If we can have a rally, we might see lenders pass along lower borrowing costs/better rates later.  For intraday updates and reprice alerts from lenders, click over to the MBS Commentary blog.