There are no scheduled economic reports set to release today that will effect mortgage rates, so traders will spend the day watching stocks and reacting to news headlines. Currently, MBS is about 4/32nds off its highs for the morning which puts us at exactly unchanged from Friday's close with the 5.5% coupon at 100-01.
This is leaps and bounds better than where we were for most of the week last week. Not to mention that MBS ended in a cycle of improvement on Friday. This means that even though we are unchanged currently, rates could be .125 to .25 of a discount point better as lenders force MBS to "hold the bar" until passing on Friday's gains to the rate sheets. So far, it looks like the bar has been held.
Since there is no relevant economic report scheduled to release today that will affect MBS pricing, the changes will come from the tenor of the stock market and other news headlines.
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 liquity 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. 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.
Still, MBS closed a good portion of the gap between their prices and those of Us Treasuries last week. This is a sign that a measure of quality perception is returning to the MBS market. As the yield on the 10 year UST rose last week, MBS yields did not follow suit remotely to the same extent. The longer this gap holds and even tightens, the better for mortgage rates, but all it takes is that one shocking headline report to send the spreads right back out to where they were.
So how do we play it today?
In the absence of MBS specific headlines, we can watch stocks to gauge tentative direction of MBS markets. Treasuries are normally a good indicator, but in the presence of high inflation, many traders are opting for MBS over treasuries which are seen as perhaps too low of a return compared to a slightly more enticing risk/reward picture in the MBS. What am I talking about? Remember that for the same dollar invested, MBS earn significantly more than treasuries if we're just looking at coupon rates. So 98 dollars buys 100 dollars worth of treasury at 3.75 whereas the same 97 dollars will get you closer to 5.0 in the MBS market. Traders' decisions on which vehicle to use are driven by the health of the MBS market and other mortgage related factors. The more stable MBS become, the more this gap can close. Historically, it was much tighter in 2003 and 2005 when rates were at all time lows. If the credit markets continue to successfully address MBS loss concerns, it leaves mortgage rates room to improve even if treasuries hold steady.
Certainly, this morning is a floater. Watch out for a surge in stocks or a tremendous tanking in the treasuries. This is a light data week which means that market "emotion" and news headlines will govern trading direction. So you have to stay glued to the send key of your fax machines which should already have your lock requests on them!
Stay tuned for any mortgage impacting updates and Happy Monday!