Mortgage Rates

Mortgage Rates: Anthony Hood Equity Investment Capital Office: 949-891-0067 Email: tony@equityinvestmentcapital.com website: www.equityinvestmentcapital.com Building Strong, Lasting Relationships; One Client at a Time. Yesterday’s Fed decision to focus its new easing move on MBSs rocked markets. Mortgage prices exploded, FNMA 30 yr 3.0 coupon up 134 bp, GNMA 3.0 up 146 bp, 15 yr price +75 bp. The Fed will buy $40B a month of MBSs until the economy improves, the most open-ended Fed initiative we have seen from the Fed. No maximum or time limit; Bernanke took a page from ECB Pres. Draghi, saying he will do what it takes to get the economy growing. The Fed appears to want to stay away from treasuries since the Fed has bought $360B of treasuries with maturities over 7 yrs, that is about 65% of the Treasury issuance this year. Many were concerned more treasury buying might disrupt the Treasury market. Based on estimates, the Fed’s easing and its re-investing principal payments back into MBS purchases may absorb up to 80% of the MBS market. With the announcement yesterday estimates are the Fed will be buying almost half of MBS issuance each month; recent data indicates issuance of MBSs is running at about $140B a month. While MBS markets rallied hard yesterday, the treasury markets were generally unchanged. This morning the 10 yr note, normally the driver for MBS markets, is increasing in yield at 1.85% early this morning up 10 bp from yesterday’s close and above its 200 day average for the rate (1.82%). On more than one occasion we have used the old traders adage; ‘never say never and never say always’; we have noted a multitude of times that the 10 yr treasury note is the driver for mortgage markets. Well, at least for the moment that isn’t working. Mortgage markets after the FOMC decision yesterday are seeing yields fall while the 10 yr note yield is increasing. How long that will continue is difficult to predict; at some level the yield spread between mortgages and treasuries will narrow to a point that investors will lose their current appetite for MBSs in favor of treasuries when risk assessments make treasuries leaders again. August retail sales were +0.9% right on target, when auto and truck sales are extracted sales were up 0.8%, when auto and truck sales and gasoline prices are extracted sales were up just 0.1%. August consumer price index was up 0.6% about in line with forecasts; ex food and energy +0.1%. Yr/yr CPI +1.7%; ex food and energy +1.9%. The 0.6 increase in the consumer-price index was the biggest since June 2009 expected at 79.2% fell to 78.2% frm 79.2% in July. At 9:30 the DJIA opened +38, NASDAQ +11, S&P +4. The 10 yr note 1.81% +8 bp. 30 yr MBS -5 bp; FHA 30s +14 bp. The U. of Michigan consumer sentiment index for mid-month was much better than expectations at 79.2, up frm 74.3 and higher than 73.3 expected. It is one of the highest sentiment readings since 2007 (May was the highest at 79.30. It is a volatile index though and in two weeks we will get it again at the end of the month. At 10:00 July business inventories, expected +0.4%, increased 0.8%; another strong data point. Treading on virgin ground. The Fed’s decision to target the mortgage markets with such heavy buying, and Bernanke’s statement that the Fed would keep it up until there is improvement in the economy, buying $40B a month in MBSs is unprecedented in its scope and intensity. We have to go with it, however it isn’t clear how low mortgage rates can go which depends on investor appetite for the product.