Thursday, January 26, 2012

Mortgage Rates



The bond and mortgage markets opened better this morning, still reacting to the Fed’s surprise yesterday saying the FF rate would stay at 0.00% to 0.25% clear out to the end of 2014. Prior to yesterday the Fed was saying mid-2013. The motivation from the Fed is that the central bank has lowered its forecasts for US growth this year and next. Bernanke apparently is more concerned about growth that he was six weeks ago. The recovery seen so far he considers anemic with unemployment to remain high for another two years, the housing sector showing little in the way of stabilizing let alone improving much, and he is very likely believing Europe will decline into another recession and that there will be defaults on a lot of the debt piled up.

The reaction to yesterday’s FOMC statement and Bernanke’s press conference was swift; US treasuries that were looking weak rallied taking the 120 yr note to 2.00% -6 bp yesterday on the close, but at 1.92% on the initial reaction. MBS prices spiked initially then backed off but still a very nice close, +16/32 (.50 bp). This morning treasuries are better as are MBS prices; at 9:00 the 10 yr note at 1.98% -2 bp and MBS prices +8/32 (.25 bp). US stock indexes at 9:00, DJIA +65; all major equity markets in Europe rallying on the Fed’s rate surprise. At 9:30 the DJIA opened +44, the 10 yr +12/32 to 1.96% -4 bp and MBSs +10/32 (.31 bp).

At 8:30 weekly jobless claims were in line with forecasts, +21K to 377K; continuing claims +88K to 3.554 mil. Dec durable goods orders were much stronger than estimates, expectations were for an increase of 2.2%, as reported up 3.0%. The more significant ex transportation orders were expected up 0.7%, as reported up 2.1%. Nov orders were revised higher, frm 3.8% to +4.3%, ex transportation frm 0.3% to +05%. The two reports added a little more strength to the stock indexes in the futures markets.

More data at 10:00; Dec new home sales were expected to increase 1.5% to 320K annualized units, as released sales declined 2.2% to 307K; based on sales there is a 6.1 month supply, for all of 2011 sales were down 6.2%. Dec leading economic indicators were expected to be up 0.7%, as reported +0.4%, Nov revised to +0.2% frm +0.5%. No immediate reaction to the data.

This afternoon at 1:00 Treasury will complete its auctions with $29B of 7 yr notes; yesterday’ 5 yr auction met with solid demand.

The slightly bearish bias in the bond and MBS markets turned quickly yesterday on the Fed’s announcement. Prior to the Fed we were thinking the 10 yr would climb to 2.15% but go no further, the highest it got was 2.09% on Tuesday. Now the obvious question we are tackling is, how low will the 10 yr yield go based primarily on the Fed holding the FF rate at current lows until the end of 2014; and how low will mortgage rates go now? It is unlikely US interest rates will decline to new lows, at this point we expect the wider trading range will continue with the possible low on the 10 at 1.80% and mortgage rates tied to a 25 basis point range in rates. The Fed is worried about the US recovery and that Europe will continue to decline with eventual debt defaults in Greece and other EU countries. Until there is another Europe shock it is unlikely that US rates will push to new low rates. It will take a few days for traders and investors to assess the message sent yesterday from the Fed when the Committee made such an unusual move.

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