So far this morning, mortgage backed securities (MBS) are holding steady, slightly above Friday’s closing levels.   For the past couple weeks, MBS have been trading in a sideways pattern looking for direction.  There does not appear to be much motivation for rates to move lower, but with the Fed constantly buying excess supply, there is also not motivation to move higher (remember that when MBS is BOUGHT, rates go DOWN).  Lenders should continue to offer 30 year fixed rates in the 4.625% to 4.875% range for the best qualified consumers.   

The week ahead is filled with many high-impact reports which should make for an interesting week: 


-       The Treasury Department will auction off $40billion of 2 year Treasury notes at 1pm eastern.  The added supply of treasuries available for sale will apply pressure on treasury yields to move higher.  This is due to the economic principle of “supply and demand”.   When there is additional supply of an item, generally the price of that item moves lower.  With fixed income investments (treasuries and MBS for example), price and yield are inversely related meaning as price moves lower, yield moves higher and as price moves higher, yields move lower.  Remember that the YIELD is another word for RATE.  High demand at these auctions, especially from indirect or foreign investors, is seen as a positive and will help to prevent a move higher in treasury and MBS rates.  Though not directly connected, rising treasury rates can exert varying degrees of pressure for MBS to do the same.  


-       The FOMC 2 day meeting begins.  The FOMC meets 8 times a year to determine monetary policy and set the benchmark Fed Funds Rate, currently in a range from 0 to .25%  The fed funds rate is the lending rate banks charge each other to borrow money overnight and serves as the benchmark for all other rates. 

-       Consumer Confidence Report:   Expectations are for a reading of 30.0 after last month’s 26.0 reading.  This report measures the level of consumer confidence by surveying 5000 households across the country each month.   If consumers are feeling confident about the economy, they are more likely to spend money which can lead to future growth and/or inflation.  MBS prefer moderate growth which leads to less inflationary pressure, so MBS generally respond favorably to a lower than expected reading. 

-       The Treasury Department will auction off $35billion worth of 5 year Treasury notes.   The added supply of debt will again place pressure on treasury yields to move higher which can result in higher mortgage rates.  However, remember that traders already know about this auction and have already made their bets based on their expectations.  So the critical event is whether or not reality varies greatly from expectations.  


-       The Mortgage Bankers’ Association Purchase Applications index.  This measures the amount of applications at mortgage lenders for home purchases.  Since housing is a huge part of our economy, an increase in this reading is seen as a positive for the stock market which can move money away from fixed income and into equities.   The thought is that consumers have to feel good about the economy and their own finances to buy a new home.

-       Advanced Gross Domestic Product (GDP).  This is a measure of the total consumption and production of goods and services in the US.  At the end of the final quarter of last year, GDP had sharply declined to a 6.3% annualized decline.  Economists are expecting this report to show a further decline in GDP to 5.0% for quarter 1.   Advanced GDP is the initial reading for each quarter, than we get the Preliminary GDP which reflects the first revisions.  Final GDP is released at the end of the next quarter.   MBS prefer moderate growth and generally improve when GDP comes in lower than expected. 

-       The Treasury Department will auction off $26billion worth of 7 year treasury notes.  The added supply of debt will again place pressure on treasuries to move lower in price, higher in yield which can place pressure on MBS to follow. 

-       FOMC meeting concludes and the accompanying statement is released setting monetary policy.  It is expected that there will be no change to the current fed funds rate since it is already at 0 to .25%.  The focus, rather, will be on the language in the statement regarding the Feds view of our current and future economic conditions, and any hints that language may offer as to how the Fed may respond in the future.   The MBS Commentary blog will cover this announcement in great detail once it is released at 2:15pm eastern.   In general, inflation, certain recovery, economic strength, etc…  would all be more likely to hurt mortgage rates than to help.  Mortgages prefer an inflation-free environment with limited economic growth so as to persuade more investors to buy bonds (like MBS!) than stocks.   


-       Personal Income and Outlays.  Personal income is the dollar value of income received from all sources and personal outlays (consumer spending) include consumer purchases of durable and nondurable goods and services.  Personal income is expected to show a month over month decline in income of 0.2% following last month’s decline of 0.2%  Consumer spending is expected to show a flat reading of 0.0% after last month’s 0.2% increase.  As part of this report, we also get one of the Fed’s favorite gauges of inflation, Personal Consumption Expenditures.  The core PCE, which strips out food and energy, is expected to show a month over month increase in consumer prices of 0.2% following last month’s 0.2% increase.   Since the PCE gives us a gauge into consumer inflation, this report can have a major impact on mortgage rates.  MBS prefer low inflation so a higher reading than expected can cause MBS to sell off resulting in higher mortgage rates.

-       Weekly jobless claims.   Expectations are for 640,000 Americans to have filed for first time unemployment insurance following last week’s 640,000.  The continuing claims number which measures the number of Americans who continue to file for unemployment benefits has set 12 straight weekly records and is currently at 6.137 million.  MBS generally respond favorably to a higher reading as higher unemployment will keep consumer spending and wage-based inflation down, which is positive for MBS and low mortgage rates.

-       Chicago PMI which is a survey of both manufacturers and non manufacturers around the Chicago area that gives investors a gauge of economic strength.   Strength in manufacturing may be a sign of strong future economic growth which can result in inflationary pressures, so MBS prefer a lower than expected reading.  Readings above 50 indicate a growing sector and readings below 50 indicate a contracting sector.  Economists are expecting this survey to show a 35.0 reading following last month’s dismal reading of 31.4. 


-       Consumer Sentiment.  This is a survey of 500 households each month on their personal financial conditions and their attitude about the economy.  MBS prefer a lower reading than expectations.   Last month’s reading came in higher than expectations leading some to believe the worst of the recession is over.  Expectations are for a 61.9 reading. 

-       The Institute for Supply Management (ISM) Index.  This is a survey of more than 300 manufacturers on employment, production, new orders, deliveries, and inventories.   This survey gives investors an idea of the overall strength of the manufacturing sector of our economy.  A strong manufacturing sector can lead to higher inflation so MBS prefer a lower reading.  The expectations are for a 38.3 following last month’s 36.3 reading.   Reading above 50 indicates an expanding sector and readings below 50 indicate a contracting sector.

-       Factory Orders.  This represents the dollar level of new orders for both durable and non durable goods.  If factory orders are increasing, that is a sign of future economic growth.  MBS prefer a slower growing economy which creates less inflationary pressure.   Economists are expecting this report to show factory orders to have declined last month by 0.5% following the prior months unexpected increase of 1.8%. 

That was a lot to cover!  Besides all the above data, we still have earnings being reported, the obligatory headline news items, and we might have a global Swine Flu outbreak.  We will stay on top of everything for you and to get updates throughout the day, click over to the MBS Commentary blog.  

Early reports from fellow mortgage professional are showing consumer borrowing costs to be slightly less than Friday’s.  So far this morning, one lender has come out offering 4.5% for a 30 year conventional rate mortgage.  To qualify for the best mortgage rates, you must have a FICO credit score over 740, a loan to value of 80% or less and be willing to pay all closing costs and 1 point origination/discount/broker fee.   I suspect all week, we will be affected by the flow of money between stocks and bonds.  If we get positive economic reports, we should see the Dow rally and MBS/Treasuries suffer and vice versa.  Also, the Treasury auctions this week will have a major impact on MBS, so let’s hope these auctions are received well especially by foreign investors.