Friday, 3/19/10 4:07 PM
The mortgage market is becoming a little unstable in the last couple of days. After holding tight for over two weeks, even in the face of the Fed's retreat from buying MBSs. The last couple of days trading is becoming more bearish. Today for most of the day mortgage prices held firm but as the end neared selling pushed prices down from their best levels when prices were up 16 bps at 1:00 to -0.9 bps at 3:00. This morning mortgage prices started quite weak, gained traction about 11:00 but couldn't hold it. Ditto fro treasuries, started soft, rebounded when the stock indexes rolled over but moving to the end of the day the 10 yr note price fell to end lower on the day; not much but suggests interest rates are becoming heavy at theses levels.
Lou Barnes of Premier Mtg Group in Boulder, CO writes a weekly commentary that usually hits the nail on the head. Lou writes for various publications; he has graciously given me permission to reprint his weekly commentary here; enjoy,it is a good read. Lou provides a fresh insight on the present and future outlook.
"Long-term Treasury rates have remained stable, the 10-year T-note in a band 3.60%-3.75% for a whole month. However, mortgages are beginning to vibrate, trying to find an appropriate level as the Fed stops buying: in just the last week rates have moved between 4.875% and 5.125%.
Treasuries are getting buying support from the slow-motion chaos in Europe. Germany has at last refused to help to Greece, saying it's an IMF problem and not the European Union's, thereby putting the rest of the Club Med dominoes on notice. Germany never has graded better than a "C" for playing well with others. France today expressed dismay at Germany's IMF proposal. Although dismay is a French specialty, it is correct: if Europe cannot look after its own, "union" is a fantasy. As so often during fracture of a collective effort, all members overestimate their individual advantage, Germany in the lead. Actual breakup -- even the departure of Greece -- would cascade cash to the only remaining safe-haven. Us. Believe it or not.
The Fed's post-meeting statement that "Economic activity continued to strengthen..." would get a poor reception in your average Main Street saloon. Improve, yeah, in places; but, "strengthen"?... nah. If it were truly strengthening, how come exceptionally-low-rate-for-extended-period? The Fed also hit the end game of its housing-forecast. In November, "Activity in the housing sector has increased"; December, "Some signs of improvement"; January, no comment; this week, "Housing starts have been flat at a depressed level."
Every administration must generate happy-talk forecasting. However, Tuesday's Geithner-Orszag-Romer official report to Congress was either the most honest ever, or if happy-spun we're in more difficulty than the Fed will acknowledge. We will not see 200,000 jobs created in a month until sometime in 2011, unemployment will still be 9% at the end of 2011, and 8% a year after that. Stranger than honesty, the report www.treas.gov/press/releases/tg589.htm recites mini-policies but is void of real stuff, nothing on what really ails the economy and inhibits recovery, or what to do.
With that backdrop, the Fed next week will stop buying MBS. Play the tape all the way back. The housing Bubble Zones began to deflate at the end of 2005. The wholesale bank run and credit collapse began in July 2007, and the Fed began to cut the overnight cost of money. Market rates, mortgages included, did not follow, as global cash instead ran to somebody's -- anybody's -- Treasury paper. Early in 2008 mortgage rates rose almost to 7% and many classes of mortgages became unobtainable, some for good (toxics), some for ill (jumbos, sensible underwriting). That credit drought pulled the housing collapse beyond the Bubble zones before the recession really hit, post-Lehman, fall 2008.
Incredibly to me, the Fed did nothing to support mortgage markets until it announced its MBS-buying intentions at Thanksgiving 2008, and did not begin to buy until January '09. Yes, the Fed could argue that such dramatic action could not be taken until the precipice was clear to politicians. The counter: no American recessions in the last 40 years ended until a deep drop in mortgage rates ignited housing. We still don't have a deep drop. The rate centerline during the Fed's 2009 buys has been the same as 2002-2003, and barely more than 1% below the 2004-2008 average -- and much of that benefit has been cancelled by hysterical tightening of credit standards at Fannie and Freddie (mercifully, the FHA has held constant, standards the same since WWII, no easier during the Bubble, no tighter now.)
The housing market has gradually fallen out from under the Fed's support in the last year, demand flat at best versus increasing distressed inventory. The utterly wacky, perverse good news: so far, perhaps due to diminished demand, perhaps because the Fed has not merely bought but removed altogether from the table $1.25 trillion in MBS... mortgage rates are holding. We'll take that."
PRICES @ 4:00 PM
10 yr note: 99.14 -3/32 3.69% +1 BP
5 yr note: 99.20 -4/32 2.45% +3 BP
2 Yr note: 99.24 -2/32 0.99% +3 BP
30 yr bond: 100.23 +11/32 4.58% -1 BP
Libor Rates: 1 mo 0.245%; 3 mo 0.277%; 6 mo 0.423%; 1 yr 0.875%
30 yr FNMA 4.5 Apr: 100.27 -4/32 (.12 bp) (+2/32 (.06 bp) frm 9:30)
15 yr FNMA 4.0 Apr: 101.25 -3/32 (.09 bp) unch frm 9:30)
30 yr GNMA 4.5 Apr: 101.13 -3/32 (.09 bp) (+1/32 (.03 bp) frm 9:30)
15 yr GNMA 4.0 Apr: 102.15 -2/32 (.06 bp) (+1/32 (.03 bp) frm 9:30)
Dollar/Yen: 90.46 +0.11 yen
Dollar/Euro: $1.3533 -$0.0071
Gold Apr: $1106.50 -$21.00
Crude Oil Apr: $80.60 -$1.60
Goldman-Sachs
Commodity Index: 521.50 -7.88
DJIA: 10741.98 -37.19
NASDAQ: 2374.41 -16.87
S&P 500: 1159.89 -5.94