My Mind on Mortgages

Mortgage rates are unchanged from Friday.

It will be a light week in terms of economic reporting.  We’ll be tracking three main influences on mortgage rates:

1. 1) US Treasury Auctions: The treasury is scheduled to auction $81 billion in notes and bonds this week.  Although treasury auctions have yet to have a material impact on mortgage rates we maintain the threat exists.  Click HERE to understand how government borrowing can influence mortgage rates.
2. 2) Greece & Portugal’s fiscal health: Over the past two weeks the problems surrounding Greece and Portugal have driven investors into “safe” US fixed-income investments.  This “flight-to-quality” has helped push yields lower.  Should the situation improve we’d expect rates to reverse higher and vice versa.
3. 3) Stock market: Whenever economic data is light mortgage-backed bonds (MBS’s) tend to react to the stock market and technical trading patterns.  Stocks have started the week lower which should help keep rates low.

Current outlook: float

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Last week I wrote this post in response to an article in the NY Times that addressed the issue of whether or not your mortgage is a moral obligation or just an economic one.  The topic is gaining more and more attention as more and more homeowner’s watch the value of their home fall further below their mortgage balance.

This morning NPR’s Planet Money did this piece in which they also addressed the subject.

It’s certainly an interesting topic and one I’d like to hear your opinion on.

Mortgage rates are slightly better this morning.

This morning’s jobs report was a mixed bag of data which is drawing a wide range of commentary amongst analysts.

Within the report there was data that would ordinarily cause rates to rise.  This included…

• The number of jobs created in November 2009 was revised higher to 65,000.
• The headline unemployment rate dropped from 10% in December to 9.7% in January.

Within the report there was data that would ordinarily cause rates to fall.  This included…

• The number of jobs lost in December was revised higher to 150,000.
• Q4 worker productivity jumped by more than expected and labor costs declined by more than expected (anti-inflationary).

The markets are trying to interpret the data.  Currently stocks are trading lower on the day and mortgage-backed bonds (MBS’s) are modestly better.  We wouldn’t be surprised to see some volatility throughout the day.

We are going to shift to a floating position because MBS prices have managed to break through technical resistance.  However, we may not be floating for long.

Current outlook: Float

Mortgage rates are slightly better this morning.  Fixed mortgage rates have now remained at the 4.875%-5.00% level since mid-January.

Whenever we see mortgage rates remain within a tight range for an extended period of time we grow increasingly concerned about a “break-out” which is when MBS prices move acutely in a short-time frame.  The catalyst for such a move could come tomorrow with the official jobs report (click HERE to understand why this report is important).

Analysts are currently expecting flat jobs numbers for the month of January.  We’ll also keep an eye out for revisions to previous month’s job figures.  If you’ll recall in December the economy lost 85,000 jobs.  We wouldn’t be surprised to see that number revised lower.

All in all we continue to feel there is more to lose than gain at this point.  We’ll remain in a locking position.

Current outlook: locking

If you are a reader of this blog’s ‘rate update‘ posts then you may be wondering why attention is paid to the US Treasury and their biweekly auctions.  The reason has to do with an economic principle called the “crowding out effect“.

According to Wikipedia ‘crowding out’ is “any reduction in private consumption or investment that occurs because of an increase in government spending.“  In this case however we’re applying this principle to borrowing instead of spending.

When the US Treasury sells notes, bonds, and/ or securities they create a substantial supply of fixed-income securities that compete with the private sector (including mortgage-backed bonds) for investment dollars.

There is a growing fear amongst market analysts that as the US deficit balloons the treasury will have to begin selling more and more fixed-income securities in order to generate enough cash to finance the government’s expenditures.  As the supply of the treasury auctions increases they will absorb more and more of the market’s demand for fixed-income securities.

Yet, private sector entities, including sellers of mortgage-backed bonds (MBS’s), will still need to raise capital so they can fund their own operations.  In order to do this in an environment where the US Treasury is “crowding out” other players they’ll be forced to offer higher and higher interest rates in order to attract demand.

This is the dynamic for how the “crowding out effect” can impact mortgage rates.  In ‘rate update’ we’ll be keeping a close eye on the size of the auctions as well as the level of foreign participation (which is a gauge on demand).

If the size of announced auctions is more than expected then this would place upward pressure on mortgage rates and vice versa.  If foreign demand in US Treasury auctions is lower than expected then this also would place upward pressure on rates and vice versa.

Mortgage rates are slightly worse this morning.

This morning the January ADP employment report was released.  This report which comes the Wednesday before the government’s official employment report is notorious for being off.  This morning’s report showed that the US economy lost 22,000 jobs in January.  Analysts are expecting a flat reading for Friday’s official jobs report.  Click HERE to learn why jobs are important to mortgage rates.

The US Treasury announced that it would auction $81 billion in 3-yr, 10-yr, and 30-yr bonds next week.  This was basically in line with expectations.  The treasury also mentioned that they may need to consider cutting auction sizes in the future.  This is good news for mortgage rates but hard to believe given the Federal Government’s ballooning deficits.

We could see yields move higher in the coming days if Greece is able to come up with a credible plan to fix its public finances.  Interest rates have fallen in the recent weeks on a “flight-to-quality” trade that could unwind.

We remain in a locking position.

Current outlook: locking

Mortgage rates are mostly unchanged from yesterday.

There is not much in the way of substantial economic data today.  Stocks are trading higher thanks to better than expected Q4 earnings from D.R. Horton (DHI).  The homebuilder reported a quarterly profit for the first time since 2007.

Bond traders appear to be on hold until tomorrow when the Treasury announces the bond supply for next week’s auctions.  In the past two auction weeks the US Treasury has auctioned almost $120 billion per week.  An announcement north of this could pressure rates higher.

And from Gobblers Knob, PA this morning Punxsutawney Phil did witness his shadow which means 6 more weeks of winter….bummer.  Someone should ship that rat to Mongolia.

Mortgage rates have now traded in a tight range for an extended period so we’ll need to be cautious of a break-out in the future.

Current outlook: locking

Mortgage rates are unchanged from Friday.

The equity markets are trading higher across the board this morning which is putting pressure on mortgage rates.  Stocks are reacting to a better than expected manufacturing report which showed that 13 out of 18 industries reported growth in manufacturing activity for January.  Good news for the economy is often bad news for mortgage rates.

The manufacturing report is overshadowing other economic data.  The Commerce Department released data that showed that construction spending tumbled in December.  The Commerce Department also released the monthly Personal Income report earlier which effectively met analysts’ expectations.  Embedded within the personal income report is the Fed’s favorite gauge of inflation known as the Personal Consumption Expenditure Price Index (PCE).  The PCE was reported in line with expectations which is good for mortgage rates.

Looking forward to the rest of the week Wednesday, Thursday, and Friday will be busy.  The week ends with a bang when we get the jobs report.  Mortgage-backed bonds are trading lower this AM so we’ll remain in a locking position.

Current outlook: locking

Mortgage rates are unchanged from yesterday.

This morning stocks are rallying putting upward pressure on mortgage rates.  The Commerce Department released the latest GDP report which showed that the US economy grew by a 5.7% annualized rate in Q4 2009.  Analysts had expected a reading of 4.8% so the better than expected results has Wall Street giddy.

Inflation measures within the GDP report showed price pressures remain subdued which is favorable for long-term interest rates including mortgages.

Similar to mortgage rates the yield on the 10-year Treasury Note has been trading near resistance for the past few days.  Given that yields haven’t been able to muster up enough momentum to break below current levels we believe this will be as low as they barring any surprise event.  We’ll remain in a locking position.

TNX: yields on 10-yr treasury times 10

Current outlook: locking