What a day we had in the mortgage industry yesterday.  Mortgage backed securities (MBS) suffered their 2^nd worse day in history after losing 2 full points in price, leading lenders to increase mortgage rates  almost a full half percent.   If you would like to know why we suffered such a loss, read these two posts: MND SPECIAL REPORT ON "BLACK WEDNESDAY": PART I and MND SPECIAL REPORT ON "BLACK WEDNESDAY" PART II. If you are a mortgage professional, these articles should be required reading as they will allow for you to better understand why yesterday happened.   Today, we should see par 30 year fixed rate mortgages in the low 5% range.  The question of the day, are sub 5% mortgages gone for now?  What is your opinion?

In a nut shell, the sell off yesterday is being driven by investors belief that the end of the recession is here and we are entering a phase of economic growth.  The fear is that the economic growth is going to lead to higher than welcomed inflation and as stated many times, inflation is the biggest enemy to mortgage rates and other fixed income investments.  Think about it, your mortgage is a debt to you  but it is an investment to an investor.  If you borrow money at an interest rate of 4.5% but inflation is at 5%, isn’t the investor losing money.  Yes, they are making a 4.5% return off of you but if inflation is increasing the price of everything they buy by 5%, they are losing money.  Currently, inflation is not a immediate concern but investors do fear higher inflation down the road due to the huge deficit and the increasing government spending.  Offering us no help with inflation is oil’s continuing climb higher currently trading over $64 a barrel. 

Let’s dive into the data for today which will more than likely be overlooked as investors wait for the final round of treasury auctions for the week at 1pm eastern.

First out this morning are the weekly jobless claims.   Initial jobless claims for the week of May 23^rd remain at elevated levels but came in better than expectations with 623,000 Americans filing for first time unemployment insurance while economists had expected 635,000.   The continuing claims, which reports the number of Americans who continue to file due to lack of finding a job, set its 17^th straight record with 6.788 million claims.   We do see a small improvement in the number of first time claims, but apparently people are finding it very difficult to find a new job.  With the possible pending GM bankruptcy, and college graduates about to hit the labor market,  I suspect we should see higher claims in the weeks ahead.   Do these jobless numbers lead you to believe that our economy is recovering?  Remember, our economy is driven by consumer spending so with so many people out of work, how will consumer spending pick up to drive the economy?  With more people looking for work and companies apparently still not in hiring mode, how can our employment situation improve which we will need for our economy to grow? 

Next we received the Durable Goods Order report from the Department of Commerce.   This report shows us whether new orders for durable goods, which are items that are expected to last for more than a few years such as appliances, are increasing or decreasing.  Increasing orders would be a sign of a growing economy since you would have to feel good about your personal finances to make a large purchase.   Economists’ surveyed had expected this report to show durable goods orders to be flat with a  0.0% reading; however, the report showed a surprising jump coming in at a 1.9% increase.  On the surface, this report is indicating a pickup in our economy but last month’s numbers were revised much lower from -0.8% decline to a -2.1% decline.   With the revision to last month’s numbers, this leaves new orders below what the market had anticipated.

The last report is the new home sales which gives us a measure of the number of newly constructed home that have a committed sale.  So, these loans have not closed as of yet but an increase in the number shows us economic momentum since the buyer of the new home will have to purchase many items to fill it such as appliances, flooring, etc…  Expectations called for an annual pace of 360,000 but the actual number came in lower at 352,000.  Last month’s numbers were also revised lower.  After the release the stock market changed directions from moving higher on the day to negative.

Finally, we have the last round of Treasury auctions, for this week.  Today the Department of Treasury will be auctioning off $26billion in 7 year treasury notes at 1pm eastern.  The added supply will place pressure on treasury yields to move higher to attract buyers.  The 2 prior auctions this week were received very well with above average demand but the pending amount of future treasuries to be auctioned is weighing heavy on fixed income investors.  Might we get an announcement today from the Fed expanding their treasury purchases?   This will be the biggest impacting item on the day barring any headline announcement.  The MBS Commentary blog will bring you full coverage of this auction after it is completed.

Early reports from fellow mortgage professionals are indicating that the par 30 year fixed rate mortgage today is at 5.25%.  In order to qualify you must have a FICO credit score 740 or higher, a loan to value at or under 80% and be willing to pay all closing costs including 1 point loan origination/discount/broker fee.  So far this morning, MBS are slightly above yesterday’s closing level but not close to a level that would spark lenders to reprice for the better.  Things will probably be quiet this morning in anticipation of the auction in a few hours.   The benchmark 10 year treasury note which closed above 3.72 is currently trading lower at 3.66 and the stock market which was in positive terroritory prior to the release of the new home sales data is currently moving lower and is down 32 points.  The only winner today which by the way also was also the only winner yesterday is oil as it is continuing its move higher and is up .60 cents per barrel, let’s all hope that changes.