Heading into the 5pm "HOLY COW THE DOW HIT 10,000 THIS WEEK" marking period (please note sarcasm), the FN 4.0 is +0-10 at 98-02 yielding 4.199% and the FN 4.5 is +0-08 at 100-23 yielding 4.414%. The secondary market current coupon is 4.36%. These afternoon price appreciations have allowed a few lenders to reprice for the better.
The FN 4.5 is trading near the highs of the day at 100-23....
The reason I say HOLY COW THE DOW HIT 10,000 is because there have been discussions within our inner circle about the five digit threshold broken by the Dow this week. Some believe the sight alone of 10,000 may be enough of a psychological catalyst to push the herd (main street) from short term money market funds and Treasuries into the stock market....which would in turn add fuel to the already on fire stock market and reduce demand side support for AAA rated Treasury debt.
It is what it is...if you cant beat 'em, join 'em?
SIDE NOTE: anyone else get the feeling that once money starts to pour into the equity markets that the likes of Goldman Sachs and such will decide its time to go short?
There is good reason for me to bring this up to you.
Because one of the biggest things that would raise the chance of mortgage rates moving higher is..........a sell off in the short end of the yield curve!!!
While we informed you yesterday that the yield curve was too steep and due for a BULL FLATTENER, which would help the 10yr avoid breaking through 3.50% and therefore dull the force of PARNERTIA which was pulling on the FN 4.5, we didnt want 10yr yields to be fall and 2yr yields to rise. That's not the right kind of flattening.
Whether its due to general BIG PICTURE optimism, an appetite for risk, or whispers about the Fed's intentions of initiating a reverse repo program...the 2yr note touched 1.00% today.
REMEMBER: A flatter yield curve means less profits from borrowing short and lending long. Less profits from borrowing short/lending long equals more incentive to let the long end of the yield curve sell off until it is once again as profitable to borrow short and lend long.
If 2yr yields rise and stay high...bankers will be more willing to let 10yr yields run higher when duration is not in demand,at least until yield curve spreads widen out enough to generate bargain buying. With the Federal Reserve slowly reducing the pace of the MBS purchase program and yield spreads already starting to gap out as a result...mortgage rates would have no safety net to rely on if this scenario played out in the bond market. Rate sheet rebate would consequently fall and mortgage rates would move higher.
Now I might acting a little dramatic because the yield curve is still relatively steep and there is still plenty of incentive to "borrow short and lend long"....but I think I accomplished my goal of alerting you of the effects that monetary policy, expectations of monetary policy, the labor market, inflation data, inflation expectations, and the shape of the yield curve can have on mortgage rates.
So while I my sarcasm about the Dow moving over 10,000 might be a bit of a joke....the chain of events that may unfold because of it would not be a source of laughter.
Stay defensive of your pipelines. The road ahead is extremely uncertain. The Fed is walking a tight rope. They must manage the market's perception of economic reality. They must be firm and they must be on time.
Enjoy the weekend.
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