Mortgage backed securities managed to stabilize yesterday and recapture most of the losses over the previous couple of days. This improvement comes in spite of a continued rally in the equities market after better than expected earnings announcements from several companies including JP Morgan, Goldman Sachs, Google, Intel, and IBM among others.   Some lenders did reprice for the better as the gains held through close. 

This morning we received earnings from Bank of America and Citibank which both reported better earnings than economists' forecasts. Citibank reported a profit of $4.28billion, helped by the sale of Smith Barney. When excluding the gain of $6.7 billion from that sale, they reported a loss per share of 27 cents, beating estimates of a 33 cents per share loss. Also beating expectations, Bank of America reported a net profit of 33 cents per share, against estimates of just 18 cents. The better than expected earnings announcements are pressuring the fixed income sector lower this morning.

Also hurting our cause this morning was a better than expected read on Housing Starts, our only piece of economic data to digest today. This data set measures how much NEW CONSTRUCTION occurred in the residential real estate sector in the previous month. This means digging has begun. Adding rooms or renovating old ones does not count, the builder must be constructing new home (can be on old foundation if re-building). We get single family housing, 2-4 unit housing, and 5 unit and above housing data.  Single family 70-80% of total home building.

Economists were expecting a reading of an annualized pace of 530,000 but the report came in much better than expected at 582,000. This follows last month's better than expected pace of 562,000.  This month's figures are still down 46% from last year, but the report provides further evidence of a bottoming in housing. The immediate reaction was positive for the stock market as the better than expected data suggests that if new homes are being built it will lead to increased demand for goods such as  flooring, appliances, lumber, etc. Furthermore at some point, if this trend continues, employment in the construction industry may pick up. Unfortunately with a surplus supply of housing already available, further building may apply more downward pressure on housing prices.

Well, that is it for data.  So what will drive the markets today? Hard to say. MBS moved lower this morning, erasing about half the gains from yesterday but they appear to be stabilizing. Currently the benchmark 10 year note has moved higher from yesterday's close of 3.56 to 3.62 and the stock market is mostly flat despite the better than expected housing report this morning. It appears that the flow of money will be dictated by the stock market again today. If stocks move lower, we should see some of the dollars move into the fixed income sector. However, if stocks rally again today, MBS could easily move lower, increasing mortgage rates.
Reports from fellow mortgage professionals are indicating better rates this morning. The par 30 year conventional rate mortgage is back to the 5.0% to 5.25% range for the best qualified consumers.  In order to qualify you must have a FICO credit score of 740 or higher, a loan to value of 80% or less and pay all closing costs including one point loan origination/discount/broker fee.

AQ and Matt provide intraday content on the markets on the MBS Commentary blog.