Mortgage Market Update

Happy Memorial Day everybody!!!  And speaking of Memorial Day, it may be high time to remember those low mortgage rates as this time may be the time when mortgage rates break out to the high side.

OK, enough of the pleasantries, let’s get down to business.  Last week, I said that overhead resistance would be put to the test again and would not break, sending mortgage rates higher and remaining within their trading range.  Guess what happened?  Yep, they tested overhead resistance, even looking like they may break it, then they sling-shotted back down to retest the bottom of their trading range, which is holding at the moment.  What sparked the ups and downs? 

Well, it was a fairly quiet week, with a few exceptions and those exceptions manage to ignite a fire under mortgage backed securities, one that ultimately fizzled out and left them without anything to prevent falling to the floor (of the trading range that is).  Treasury Auctions started out nicely, then we saw housing take a hit, though that may be good news as inventory dries up.  Then came the FOMC Minutes and some parts of the “Fed Unplugged” version got MBS moving higher, such as the talk about adding even more MBS purchasing.  But then came Thursday and the fire was snuffed to say the least.  The most important factor was that of the Treasury Announcement, which is sending record loads of supply into the markets and traders were left wondering exactly who was going to buy all this supply up, especially with the Fed backing down their purchasing.  Friday’s attempted rally fizzled out as well, and mortgage bonds fell all the way back to the bottom of the trading range, sending mortgage rates to their recent highs.

Granted this past week was volatile due to the upcoming holiday, but this week will add to that volatility as the week is shortened due to the markets being closed for Memorial Day.  As for data plays, here is the list…

• Monday:  Memorial Day, markets closed
• Tuesday:  Case-Shiller HPI (9:00), Consumer Confidence (10:00), 3-month T-Bill Auction (11:30), 6-month T-Bill Auction (11:30), 2-year T-Note Auction (1:00)
• Wednesday:  MBA Purchase Applications (7:00), Existing Home Sales (10:00), Crude Inventories (10:30), 4-week T-Bill Auction (1:00), 5-year T-Note Auction (1:00)
• Thursday:  Durable Goods Orders (8:30), Jobless Claims (8:30), New Home Sales (10:00), 7-year T-Note Auction (1:00), Money Supply (4:30), Richard Fisher Speech (5:45)
• Friday:  GDP (8:30), Chicago PMI (9:45), Consumer Sentiment (9:55)

As you can see, all that Treasury supply is going to hit the markets, and hit them hard.  Bad timing is likely an understatement as we are in a shortened trading week and that could prove overwhelming for mortgage backed securities, and may send mortgage rates higher. 

Taking a look at the charts, there really isn’t any good signs to be found either.  We have a negative crossover in the moving averages.  Stochastic indications are negative with room to go on the downside.  And the 100-day moving average is now acting as resistance as could be seen on Friday’s failed rally attempt.  In fact, the only good to be found is that we have not broken below the bottom of the sideways trading pattern we have been in for a while. 

So what lies ahead?  More of the same?  Can MBS pricing maintain its current trading pattern?  Or will the trading range be broken as the flood of Treasuries hits the markets?  Time will tell for sure, but my bets would be on the latter at this point.  The good thing is the markets are closed today, so they can’t climb any higher at the moment.