After a nice rally yesterday, prices of mortgage backed securities (MBS) have moved lower this morning, indicating a probably rise in rates. Remember, as price goes DOWN, investors supplying the money for mortgages are essentially demanding a higher return in order to buy. That “return” correlates to rates. Around the globe, stock markets are in rally mode after global consumer confidence improved for the 3rd month in a row leading many around the world to believe the worst is over. But stocks don’t even need to rise in order for mortgages to feel the ill effects of a bullish global economy. Why? Basically, markets have “planned for the worst” by investing in low rate, long term bonds such as the 10yr treasury. Lower rate mortgages (which tend to last the longest as they’re less likely to be refinanced) come along for that ride as an alternative or compliment to treasuries. So when sentiments arise that the recovery may be taking shape sooner and better than expected, these long term, low rate positions get hammered because they would vastly underperform in a “recovered” economy.
We do have some economic data to digest this morning. The Mortgage Bankers’ Association Index reported Purchase Applications fell 7.2% for the week ending June 5th. Purchases showed a slight improvement of 1.1% while the refinance activity fell 12%. With the sharp and sudden increase in mortgage rates, it is not surprising to see the refinance activity drop substantially. The overall reading is the lowest level since February. It is the stated goal of the Fed to keep mortgage rates down to help the housing sector to recover which will also help the overall economy. The Fed continues to be very quiet in regards to this sharp increase in mortgage rates. Do you feel they are doing the right thing by remaining quiet? Or is there anything they can do at this point?
In other scheduled data this morning, the U.S Department of Commerce reported that the trade balance worsened from April growing to $-29.2 billion following last month’s revised $-28.5 billion gap. Our exports dropped by 2.3% while imports declined 1.4%. The drop in our exports is a sign of weakness in our manufacturing sector which is somewhat of a negative for stocks, but this report in and of itself is not enough to dictate market direction on the day.
The big event taking place today is the 2nd of 3 treasury auctions for the week. Treasury will be auctioning $19 bln in 10 year treasury notes at 1pm eastern. Since the supply is known in advance, the most important aspect of the auction will be the demand. Yesterday’s 3 yr treasury auction was received fairly well, with good overseas demand. The 10 year auction is much more related to MBS because of “duration,” which measures how long a mortgage lasts before being paid off (via refinancing, selling, foreclosure, etc…) Bottom line, the average is much closer to 10 yrs than to 3. In somewhat negative news for our treasuries, Russia announced last night that they might pull some of their reserves out of treasuries. This caused treasuries to sell off last night increasing their yields, bringing MBS down with them. The MBS Commentary blog will have complete coverage of the auction after it is completed.
Later today we do get the release of the Beige Book which is a report on economic conditions and is one of the many tools used by the Fed to decide monetary policy. In general, the stronger the indications the fed has about future economic growth, the more likely they are to raise rates in order to prevent the excessive and/or inflationary growth. The Fed has 3 policy’s, accommodative(lowering rates), neutral(keep things steady) and restrictive(higher rates). Since investors appear to be buying into “the worst is over” mentality, I suspect that this report will carry a little more weight today than in previous months and may impact the markets even though much of the data from this report is already known.
Other than speeches from a few members of the Fed, that is it for the economic data. Any time we get Fed speak, it can result in a unexpected tape bomb (sudden unexpected movement in securities’ prices). With the various things going on today, stay seated with your seatbelts in full lock position. We are probably in for a bumpy ride. Currently, all markets are looking for some direction.
Early reports are indicating that the par 30 year fixed rate mortgage to be in the 5.5% to 5.75% range for the best qualified consumers. This is slightly worse than yesterday. In order to qualify, you must have a FICO credit score 740 or higher, a loan to value of 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee.