Good morning everyone. I just got back from Belo Horizonte (Brazil) and it never ceases to amaze me how people react while flying after a recent airline accident. Nevertheless, mortgage backed securities seem to be crashing and burning right now. However, unlike Air France flight 447, we can see what is causing this disaster.
First off, if you read last week’s Mortgage Market Update, you saw that I mentioned that the 200-day moving average could break during last week, which it did on two of the driving mortgage backed securities, the FNMA 4.0% and the FNMA 4.5%, the latter happening in Friday’s meltdown.
So what is driving mortgage rates higher, and why so fast?
It is not just about jobs, as some people mention. It is about a number of factors, one of them being the Fed themselves, as they have cut back on their MBS purchasing lately. Since they were the buyer of first resort and their actions were what artificially propped the markets, is it any wonder that the markets fall dramatically when they are not buying as much? Then there is the Chinese, which have become more publicly expressive of their concerns about the ongoing debasement of the dollar and they have basically stopped buying long-term US debt instruments in favor of gold and other commodities that are excellent hedges against what our government is doing to the dollar. Add in the fact that jobs were far better than expected, even if the recent job growth is due largely in part to the Fed adding temporary positions, and the fact that traders shrug off the increasing Unemployment Rate to some extent. And then there is inflation. While some attempt to nullify its effects, inflationary concerns are a reality and those concerns may come to fruition in the coming months.
So what lies ahead?
With MBS pricing plowing through support like it is paper these days, the question I keep bringing up, and one I have discussed for over 6 months now, is the “Mortgage Rate Bubble” popping. Currently, the charts show that it may very well be. There are glimmers of hope as with every move, or step, lower, a correction needs to take place as well, which you can see in the charts since the last downtrend started. Stochastics have moved into the oversold spectrum, so the next bounce may be coming as early as today. Overall though, the downtrend is clearly established and we will need something to break that pattern, a pattern which will take days at least to break. Here are the opportunities that are scheduled for this week…
- Monday: 3-month T-Bill Auction (1:00), 6-month T-Bill Auction (1:00)
- Tuesday: Wholesale Trade (10:00), 4-week T-Bill Auction (1:00), 3-year T-Note Auction (1:00)
- Wednesday: MBA Purchase Applications (7:00), Charles Evans Speech (8:00), International Trade (8:30), Crude Inventories (10:30), 10-year T-Note (1:00), Beige Book (2:00)
- Thursday: Retails Sales (8:30), Jobless Claims (8:30), 30-year T-Bond Auction (1:00), Dennis Lockhart Speech (1:05), Money Supply (4:30)
- Friday: Consumer Sentiment (9:55)
As you can see, this week will be fairly quiet, though some events and data will play a big role in the future of mortgage rates, especially Retail Sales. The 30-year Treasury Bond Auction and even Consumer Sentiment will likely also add to the drama, as well as the Beige Book. For the most part, though, and at least for the start of the week, technical factors will be in the drivers seat, and that means any rebound may get us back above the 200-day moving average and give mortgage rates a fighting chance. Personally, I don’t think that any move higher will hold, but it will offer a good opportunity to float for at least a brief period of time.
The bottom line is that the rollercoaster ride that started a couple of weeks ago will continue for the foreseeable future. The overall path of mortgage rates continues to point higher unless MBS pricing can find some reason to strengthen, which is not very likely right now.
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{ 2 comments… read them below or add one }
It would be nice to have a rollercoaster, but I think we have seen the last of sub 5 rates – with the increasing US debt, foreign investor response to the increase, inflation concerns, and hints of economic recovery, the Fed may not have much ability or desire to continue purchasing MBS.
This may or may not be relevant, but you should know that there's a big storm brewing in the hotel industry. There's hotels falling into foreclosure in dozens and lenders pulling out of big projects. And this is not old stuff. Started couple of weeks back, and it's gaining ground. Reason I stress on it is that the main cause is the drop in real estate values of the properties, which is making investors think that it's better to cut losses and hand it back to lenders, rather than struggle on in the hope that real estate values will go back up.