Mortgage Backed Securities (MBS - the bonds that directly relate to mortgage rates), had a rough week last week. By Friday afternoon, they had recouped much of their losses and pushed higher through the end of the day. But it was certainly not enough to get us back to the great rates we were seeing 7 days prior.
Friday's post discusses some of the reasons for the weakness, but the main theme was stock market bullishness coupled with persistent inflation data.
This week is very light in terms of scheduled economic reports. Traders analyze these reports to gauge market direction, so if they are greatly higher or lower than expectations, markets react accordingly and interest rates can move up or down. Not only is this week light in terms of those reports, but today, in fact, we have none. When this is the case, traders turn to news headlines, and the financial markets grapevine to get an idea of how to trade. None of the big stories so far are having a negative impact on MBS, but they also have mixed blessings that are preventing rates from improving past their highs of last Friday.
Speaking of headlines, here they are:
1. Bank of America's profit declined 77% owing to credit losses and write downs. This is bearish news for the economy which is usually good for MBS, but because B of A is a big player in MBS, the stock market bearishness is offset by probable worries that another banking giant with signs of credit fallout is an ill omen for liquidity in the mortgage backed security market.
2. National City, a top-ten bank is working on a plan for capital infusion, which several other large firms have done recently. Again this is a mixed blessing at it signifies weakness in the financial sector which is good for MBS from a sense of contributing to a slowing economy, but because National City has mortgage holdings, it hurts a bit as well. Another "wash" just like B of A.
3. In the UK, their central bank, in a similar move to our own Fed, is offering 100 billion to shore up risky debt with government debt. This is thought to create much-needed liquidity in the credit markets. Yet another mixed blessing as liquidity is good for mortgage rates, but it is also good for the stock market because when large banks can unload their mortgage holdings, it frees up capital for growth which can hurt mortgage rates.
4. Oil continues it's foray into record high territory. This bodes ill for inflation, little of which has been passed on to the end consumer yet as evidenced by the discrepancy in the PPI versus the CPI (producer and consumer price index - key measures of inflation). MBS do not like inflation, so although we don't normally see high oil prices with a direct effect on mortgage rates, this is another factor that prevents us from gaining too much today as traders must concern themselves with the threat of even worse inflation data looming. On the flip side, pricey oil also slows the economy which is good for mortgage rates. Another mixed blessing?
5. More and more economists and analysts are calling the duck a duck as they begin to agree that we are headed into a recession. "Headed into?" Where have these guys been?! The number of analysts at large firms who are predicting negative GDP and other "bad stuff" has risen to levels not seen since the last recession in 2001. In general, this is good news for mortgage rates as a recessionary economy motivates traders to move money into fixed income. If we weren't dealing with inflation and concerns about the mortgage market, MBS would be doing even better.
All in all, rates should be ever so slightly better than they were on Friday afternoon. We have not lost any ground this morning, and as long as the stock market stays tepid and we avoid mortgage related negative headlines, this trend should continue and we can even gain some ground. We're getting close to the territory again where locking can make too much sense to pass up, though rates have had a reasonably regular pattern of ups and downs recently. Don't assume they will always come back down if they go up however, because historically, they will have to head north for an extended period of time. Hopefully that time period is farther away.
Stay tuned for any mortgage impacting updates and Happy Monday!