Thursday, 3/4/10 4:10 PM
It was quiet today ahead of employment tomorrow; nevertheless mortgage prices continued to edge higher even in the overbought technical's. Data this morning was mixed, better Jan factory orders but a larger decline in Jan pending home sales and a jump in weekly jobless claims kept a very slight bid at the long end of the yield curve. The short end, 2 yr notes saw increased rates.
Q4 productivity up 6.9% and unit labor costs down 5.9% confirms no new hiring and employers getting substantially more output from workers. While it is historic data with 2/3 of Q1 already behind us, it does suggest employers will be slow to add new hires as long as productivity is high and unit labor costs low.
This morning's Jan pending home sales and the huge declines in existing and new home sales in Jan strongly imply the homebuyers tax credit isn't getting the job done. Should have been better on all accounts based on the forecasts prior to the data releases. Is it just because it was Jan which is usually a soft month for home sales, or counterintuitive to the growing idea that the housing markets have bottomed? No matter what series one looks at, there was no sunshine in housing in January. Feb existing home sales are not out until Mar 23rd and new home sales for Feb the next day.
Next week Treasury will auction $74B of notes and bonds. On Tuesday $40B of 3 yr notes, Wednesday $21B of 10 yr notes and Thursday $13B of 30 yr bonds. It is every other week we face supply; not counting the bill market (issues with no more than a 1 yr term), Treasury is selling $192B of notes and bonds each month. So far the demand has been good by foreign sovereigns and investors (indirect buyers) and recently direct buyers that go directly through Treasury to buy instead of through primary dealers. Trade worries about the direct buyers taking down so much of the auctions, not knowing who the buyers are and concerns the purchases are in weak hands that may unload massive amounts on changing fundamentals rather than holding the debt for longer timeframes. Speculation is that the directs may be hedge funds.
Fannie Mae purchased $54.9 billion of mortgages from its seller/servicers during January, a 23% drop from December but a significant improvement over the same month last year. In December the GSE bought $71.8 billion in loans, while in January 2009 - with the credit markets still reeling - it purchased just $28.8 billion. Fannie's purchase volume is a reflection of origination activity in the primary market. Mortgage and housing economists anticipate that residential loan volume will total anywhere from $1.2 trillion to $1.7 trillion this year, depending on where interest rates and employment wind up. Meanwhile, in its most recent activity report, Fannie noted that the serious delinquency rate on its single-family loans rose only 9 basis points in December to 5.38%, after jumping 135 bps over the previous five months. (The GSE's delinquency figures lag by one month.) It is the smallest monthly increase since July 2008 when the percentage of Fannie loans 90 days or more past stood at 1.45%. The GSE expects its serious delinquency rate will remain high in 2010, but the growth of that rate will moderate. "We anticipate that the pace of loans transitioning out of serious delinquency status will increase as the number of foreclosures and problem loan workouts that we complete increases," Fannie said in a recent earnings statement. The monthly activity report also shows that delinquency rates on Fannie multifamily loans fell 3 bps in December to 0.63%. Fannie issued $47.6 billion in mortgage-backed securities in January, down from $55.4 billion in the previous month. In 2009, Fannie MBS issuance totaled $807.9 billion, compared to $542.8 billion in 2008. (Nat'l Mtg. News)
I realize I am like the boy who called wolf too often when I refer to the rate markets being overbought and due for a pullback. It hasn't happened and more importantly mortgage prices have continued to edge higher. However, I have to continue to caution the bond and mortgage markets are over-extended based on momentum oscillators (we show you them in the report). It is extremely rare that the oscillators fail to justify a change, even if temporary. The mortgage market particularly is overbought in the near term. Chart resistance is at 101.19/32 or 101.58 basis points, current price of FNMA 4.5 Mar coupon is 101.12/32 or 101.37 basis points; it is lining up for a pullback but we should wait for it, just be prepared; the depth of a pullback can't be quantified---could be minor. The 10 yr note is at a wall of resistance at 3.60% where it sits now.
PRICES @ 4:00 PM
10 yr note: 100.05 +5/32 3.61% -2 BP
5 yr note: 100.15 unch 2.27% unch
2 Yr note: 100.01 -3/32 0.86% +4 BP
30 yr bond: 101.04 +17/32 4.56% -3 BP
Libor Rates: 1 mo 0.228%; 3 mo 0.252%; 6 mo 0.383%; 1 yr 0.834%
30 yr FNMA 4.5 Mar: 101.13 +7/32 (.22 bp) (+6/32 (.18 bp frm 9:30)
15 yr FNMA 4.0 Mar: 102.08 +5/32 (.15 bp) (+6/32 (.18 bp) frm 9:30)
30 yr GNMA 4.5 Mar: 101.29 +8/32 (.25 bp) (+7/32 (.22 bp) frm 9:30)
15 yr GNMA 4.0 Mar: 102.30 +5/32 (.15 bp) (+5/32 (.15 bp) frm 9:30)
Dollar/Yen: 89.11 +0.65 yen
Dollar/Euro: $1.3586 -$0.0108 (dollar strong)
Gold Apr: $1132.60 -$10.70
Crude Oil Apr: $80.56 -$0.31
Goldman-Sachs
Commodity Index: 519.73 -5.71
DJIA: 10444.14 +47.38
NASDAQ: 2292.31 +11.63
S&P 500: 1122.97 +4.18