Last week saw a pretty wild ride, to the downside of course, which sent mortgage rates climbing, finally. Fortunately my flights lately have not had a wild ride, though I did have one early last month. Obviously, the move was not unexpected for this individual, nor most of the readers here I am sure.
So what happened that got mortgage backed securities out of their “groove”. Well, the Fed had backed down somewhat on their MBS purchasing spree lately, though they still have been working hard to manipulate the markets to at least minimize the damage. Beyond that, data simply is showing a better economy than expected, though inflation thus far is mostly in check. Amazing how a contracting economy can be seen as good news, but since it is contracting less than expected, traders are seeing it as the beginning of a recovery. I rather doubt it as my post at Florida Mortgage Report describes.
As the data flowed this week, it was not alone as far as hurting mortgage bonds goes. The Fed was even praising that the economy is improving (or at least sucking less), a sentiment echoed by the Economic Cycle Research Institute. The Fed even went on to say that inflation should remain low for a quite some time. That may be true since they can have the numbers altered as need be, just like previous administrations have done. Reality can be quite different though. On top of it all, the Treasury Department announced a new record amount of Treasuries to be auctioned, a record which will likely be beat during the next announcement. With all of these factors hurting MBS pricing, not even Chrysler’s bankruptcy could keep mortgage rates from rising.
You may be wondering what lies ahead now, right? First off, let’s take a look at the calendar of events…
- Monday: Pending Home Sales (10:00), Tom Hoenig Speech (12:30), 3-month T-Bill Auction (1:00), 6-month T-Bill Auction (1:00), Jeffrey Lacker Speech (2:00)
- Tuesday: Eric Rosengren Speech (6:45), Ben Bernanke Speech (10:00), ISM Services Index (10:00), 52-week T-Bill Auction (11:30), 4-week T-Bill Auction (1:00), 3-year T-Note Auction (1:00), Gary Stern Speech (1:15), Janet Yellen Speech (7:00)
- Wednesday: MBA Purchase Applications (7:00), ADP Employment Report (8:15), Gary Stern Speech (9:00), Crude Inventories (10:30), 10-year T-Note Auction (1:00), Treasury STRIPS (3:00), Janet Yellen Speech (5:30)
- Thursday: Jobless Claims (8:30), Productivity (8:30), Ben Bernanke Speech (9:30), 30-year T-Bond Auction (1:00), Money Supply (4:30)
- Friday: Nonfarm Payrolls (8:30), Unemployment Rate (8:30), Hourly Earnings (8:30), Average Work Week (8:30), Wholesale Trade (10:00), Jeffrey Lacker Speech (1:00)
It is quite obvious that the main event of the week will be Friday’s Jobs Jamboree, but there is plenty of other action going on this week, included the auction of those record setting Treasuries, which the longer terms have been demanding higher yields, which will likely pressure mortgage rates higher as well. Plenty of “hot air” will be thrown out there as the Feds have speeches every weekday this week. Plan on a volatile week ahead, with mortgage backed securities likely breaking out of their trap and I expect that breakout to be lower, thus sending mortgage rates higher.
Getting into the technical indications, looking back over the last quarter to six months, you can clearly see that everytime mortgage bonds tried to set new lows, they failed. Most recently, a double top has formed, though the good news is that the rug hasn’t been pulled out, at least not yet. Currently, mortgage backed securities are trapped between their 25-day and 50- and 100-day moving averages, in a fairly narrow trading range. That range will be tested and likely broken this week. I expect a retest of the 25-day moving average before the floor of the other two falters. Stochastics show a negative pattern at the moment, though mortgage bonds are heading back into the oversold spectrum.
The bottom line from what I can see is that barring any major Fed manipulation, and that would have to be a major push by the Feds, mortgage rates will bounce back and forth slightly, ultimately moving higher by week’s end as they did last week.
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I just read that Bernanke speech isn't going to rock the boat. Article says that he'll probably be 'cautiously optimistic', whatever that means.
It seems that the Federal Reserve and US Treasury are starting to look at how to quietly tip-toe back out of the market-maker position. That is going to be very difficult to do without making a mess.
Agree with your assessment of the recovery not coming any time in the immediate future. Our market is now 17% below 2008 numbers (which was down 24% on '07), and although inventory has flattened out, buyers are still few and far between. Take in to account we're considered a stable area of the state of Georgia, and you see the writing on the wall. I see a late-year recovery that will not bear fruit in my trade until early '10.