Mortgage Market Update

One thing in life is inevitable, and that is change.  Last week saw little in the way of market moving data or events, that despite the chances the Feds had to talk up the markets.  This week, things will change as the week draws to a close.

A quick recap, and I do mean quick, shows us that mortgage backed securities continue to struggle to maintain low mortgage rates.  Here is how I ended last week’s update…

The bottom line for this week is that there will be a chance to gain lower mortgage rates for a brief period, though do not expect to see them get back to recent lows.  Take advantage of the move, but be ready for the next leg of mortgage rates moving higher.

Interestingly enough, this is almost exactly what happened, as MBS pricing did climb to about the 50% retracement level, then immediately turned lower, all taking place on Tuesday.  Mortgage bonds continued their attempt to find strength, but ultimately their 10-day moving average kept pushing them lower and they ended the week down about 12 basis points.  The housing market recovery remains questionable as the data showed increases in pricing and in existing home sales, but the new homes market may not be ready for a comeback as new home starts and building permits were down.  Inflation appears to remain in check, though the future economic improvement is still hopeful.  That’s the recap in a nutshell.

As for the week ahead, it is going to come in like a lamb and leave like a lion.  Just like last week, we start off with just the short-term Treasury Auctions, though we do add the 5-year TIPS to the mix which could add some volatility.  Things due start heating up starting on Tuesday and and then get slammed on Friday.  Here is the current breakdown of events…

• Monday:  3-month T-Bill Auction (11:30), 6-month T-Bill Auction (11:30), 5-year TIPS Auction (1:00)
• Tuesday:  S&P Case-Shiller HPI (9:00), Consumer Confidence (10:00), 4-week T-Bill Auction (1:00), 2-year T-Note Auction (1:00)
• Wednesday:  MBA Purchase Applications (7:00), Durable Goods Orders (8:30), New Home Sales (10:00), Crude Inventories (10:30), 5-year T-Note Auction (1:00)
• Thursday:  Jobless Claims (8:30), GDP (8:30), 7-year T-Note (1:00), Money Supply (4:30)
• Friday:  Personal Consumption Expenditures Index (PCE – 8:30), Personal Income (8:30), Personal Spending (8:30), Employment Cost Index (8:30), Chicago PMI (9:45), Consumer Sentiment (9:55)

As you can see the week will slowly build to its climax on Friday, and mortgage backed securities will be put to the test this week.  Remember that inflation is the archenemy of MBS prices, and thus mortgage rates, but even signs of an improving economy can destroy mortgage bonds as well.

Looking at the charts, we see mortgage backed securities are trying to develop a bottom and establish a sideways trading pattern at their current levels.  Stochastic indications are showing this may be a possibility, though it is a stretch as the only positive sign is that they are entering the oversold spectrum.  Remember that the 10-day moving average was nose-diving for the 50-day and 200-day moving averages and it is almost there, though it is flattening out now.  With current MBS pricing below the 50-day, the momentum will clearly establish a negative crossover, which is never a good sign.  And with the 200-day moving average just 4 basis points below the 50-day, we may very well see a double negative crossover on the same day, or shortly thereafter, if MBS pricing cannot find the strength to rise again.

The bottom line for this week is that there will be a severe stress test of mortgage bonds and their ability to rise above it all.  Looking at the charts, I see them failing this test, but I will take it day by day because strange things happen in the markets these days.  If you want my daily mortgage market updates, visit Florida Mortgage Daily.  I am turning the Fasten Seatbelt Sign on as we may experience some turbulence.