robert

Greetings from Sao Paulo again this week.  I hope everyone had a very Merry Christmas and didn’t travel as much as I have in the last week or so.  Last week didn’t see as much volatility as usually can be seen with shortened trading days and a shortened week, and mortgage rates ending the week basically where they started.

We did see the week start off with a pullback which was expected and fortunately was not as much as could have been.  As data began to flow, we saw mortgage backed securities began to climb back to end the week slightly down as inflation fell back into the Fed’s “comfort zone” and news about the economy remains negative.  There were several Treasury auctions last week as the government continues to cover the bailouts, among other things.  We saw another 4-week auction bid 0.00% yield and we saw relatively low foreign participation, which is not good news for mortgage bonds.

This week will be light on data as well, along with another shortened trading week, so volatility could show up, or we could see another tame week like this last one.  The ISM Index will be the major player of the week and will be the first set of data of 2009.  Here is the rest of the week’s data:

• Monday:  No data scheduled
• Tuesday:  Consumer Confidence (10:00)
• Wednesday:  Initial Jobless Claims (8:30), Chicago PMI (9:45), Crude Inventories (10:30)
• Thursday:  HAPPY NEW YEAR!!!
• Friday:  ISM Index (10:00)

Looking at the charts, we can see that mortgage backed securities remain along their 10-day moving average and in a narrow trading range, and may make an effort to reach new highs this week, though I suspect we will see them remain fairly flat again overall.  Stochastic indications are giving some breathing room as the rest on the bottom of the “overbought” zone, so we may see some new life for mortgage bonds as the new year starts.

Just got back from another all-nighter from Brazil, which has become somewhat of the “norm” for me.  Likewise, we are seeing much of the “norm” in the mortgage bond market at the moment.

Last week was rather interesting to say the least, but certainly not unexpected.  Mortgage rates managed to edge out some nice gains, primarily on the heels of the Fed’s Policy Statement which is issued simultaneously with their rate decision.  I have always stated that the Policy Statement is more important to mortgage rates than the actual rate decision, and this time was no different, getting mortgage backed securities to rally on the news the Fed will keep buying up mortgage backed securities.  That news, even after some correcting, brought mortgage rates down another 0.25% this week.

But the Fed wasn’t the only news.  The Big 3 auto companies finally got the bailout, though less than what they really wanted.  The total bailout amount that President Bush allowed through the TARP was $13.4 billion with Ford saying it hoped not to tap into a credit line.  More money would be offered in February if need be.  And with inflation apparently in check, at least based on the latest CPI data, mortgage rates do not seem to have an enemy right now.  Initial Jobless Claims are still running high and the economy still appears to be slowing.  All good news for mortgage rates.

So what does this week hold?  We have the real inflation report coming up Wednesday, the PCE (Personal Consumption Expenditures Index).  Beyond that, there are a few other sets of data slated to be released, but the real issue will be the potential of increased volatility due to the shortened trading week as we celebrate Christmas.  Here is the breakdown of the data scheduled this week…

• Monday:  Nothing
• Tuesday: GDP (8:30), Chain Deflator (8:30), Existing Home Sales (10:00), New Home Sales (10:00), Consumer Sentiment (10:00)
• Wednesday:  PCE (8:30), Initial Jobless Claims (8:30), Personal Income (8:30), Personal Spending (8:30), Durable Goods Orders (8:30), Crude Inventories (10:30)
• Thursday:  MERRY CHRISTMAS!!!
• Friday:  Nothing

As you can see, the big day will be Wednesday, with a multitude of data coming in which includes the PCE.  Of course, news can also shake the markets as well, just as it has in the past.

Looking at the charts, we see mortgage backed securities trading in a fairly narrow range that Wednesday’s data could break them free of in either direction.  Stochastic indications still show an overbought condition, but that hasn’t stopped mortgage bonds in the recent past as news and data have managed to help them rally nonetheless.  But we do have a problem.

Mortgage rates are now at the lowest any of us have ever seen, except a few maybe, since they are now at the lowest level in 50 years.  The problem is that the latest moves in mortgage backed securities have been mostly due to the Fed and the Treasury (Bernanke and Paulson) “propping up” mortgage bonds with promises to be the buyer of last (or is it first?) resort.  With an artificial move in mortgage bonds, the government’s latest attempt to boost the housing market through lower mortgage rates, we have essentially created a “mortgage rate bubble”. As such, lenders will be pricing in “hedges” and any moves lower for mortgage rates will most likely be minimal at best.

Sure, we may see mortgage backed securities continue their rally, but what will be the ultimate cost in the long run?  With increasing risks of a bubble bursting, I don’t think mortgage rate pricing will see much benefit, if any, from any further movements higher in mortgage bond pricing.

What an interesting week we had last week, with mortgage backed securities closing the week at their highest level in five years, something I have been saying was coming all week on Florida Mortgage Daily, despite the hiccups that caused rate lock alerts. So, what does the future hold for mortgage rates?

Before we answer that question, let’s look at what got us here last week.  The week started off with no real data to get the markets moving, but the news of the Big 3 auto deal was able to shake the markets a bit.  There was some hints of a strengthening housing market, with California and Florida’s Pending Home Sales actually rising.  The treasury auctions went fairly well, with a very bizarre auction on Tuesday that saw traders bidding a net loss for the 4-week T-bills and fairly good foreign participation for the remainder of the week. 

As the real data flowed, it continued to favor mortgage bonds and mortgage rates.  Initial Jobless Claims hit a 26-year high and Retail Sales dropped more than expected, especially after Black Friday’s report.  PPI also was favorable overall, indicating inflation has not cost price increase at the producer level, at least not yet.  Surprisingly, Consumer Sentiment beat expectations.  Not so surprisingly, the Fed is seeking permission to issue their own bonds, something that is prohibited by the Federal Reserve Act.  Overall, mortgage rates dropped .25% this week and look good to drop further.

As this week gets started, we will see more data than last week and some heavy hitters are coming up, including the next rate decision by the Feds, which extended their meeting to two days instead of the normal one in December.  Traders had been expecting a 50 to 75 basis point cut, but rumors that the Fed may surprise the market are running rampant now.  Inflation will be seen as measured by the CPI and we will see the Philadelphia Fed Index as the week draws to a close.  Here is the breakdown…

• Monday:  Empire State Index (8:30), G.17 Statistical Release (Industrial Production and Capacity Utilization) (9:15)
• Tuesday:  Consumer Price Index (CPI - 8:30), Housing Starts (8:30), Building Permits (8:30), FOMC Meeting (2:15)
• Wednesday:  Crude Inventories (10:30)
• Thursday:  Initial Jobless Claims (8:30), Philadelphia Fed Index (10:00), Index of Leading Economic Indicators (LEI - 10:00)

As you can see, there are some opportunities for mortgage bonds to break through even more resistance levels, or even get pushed back some.  There will certainly need to be some pullback periods as bonds keep pushing higher and higher, not mention the need to draw from the oxygen bottle as they reach new heights. 

As for technical indications, the breakthrough that happened last week virtually gives mortgage bonds free reign to drive mortgage rates down, just how low is all that remains to be seen.  2003?  4.5%?  Only time will tell for sure, but it will likely be a while before we see rates like those, if we even get there.  Stochastic indications are reaching back into the overbought spectrum indicating the need for a pullback eventually, but the overall trend continues to be higher mortgage bond prices and lower mortgage rates for the predictable future.

Greetings from Santa Cruz, Bolivia this time.  Saturday night, part of our voyage was to fly to La Paz, Bolivia, then over here.  You may have already heard of La Paz due to its airport being the second highest commercial airport in the world with an elevation of just over 13,300 feet.  Since the airport is over 10,000 feet, we are required to use oxygen for all operations during which our cabin is above 10,000 feet.  Mortgage bonds may need oxygen if they reach the heights that Treasury Secretary Paulson wants them to go.

Last week saw a reiteration from the Fed that they are going to keep buying mortgage backed securities and Paulson even came out saying he wants to drive mortgage rates down to 4.5%.  As the data flowed, we saw more and more reasons to focus on our dismal economy and forget about inflation, but do not let that sleeping giant awaken unnoticed, for it will awaken eventually.

The week started off with a worse than expected ISM Index, followed by ISM Services Index.  The big kicker of the week, besides the Fed and Paulson’s statements indicating the buying of MBS will continue, was the ADP Employment Report, and ultimately the horrendous jobs report.  Strangely, if you watched the bond prices during the week, they moved down at the beginning and changed course only towards the end, with mortgage rates ending the week slightly worse.  Once again, we are seeing data unable to move the markets solidly as news and even technical indications take control.

What does the future hold, though?  This week will be fairly quiet when it comes to data, with some moderately impacting reports due out, that is until Friday’s Retail Sales.  With a better than expected Black Friday, it will be interesting to see the Retail Sales numbers.  We will also see the PPI on Friday.  Here is the breakdown of scheduled data…

• Monday:  No data
• Tuesday:  Still no data
• Wednesday:  Crude Inventories (10:30)
• Thursday:  Initial Jobless Claims (8:30), Balance of Trade (8:30)
• Friday:  Retail Sales (8:30), Producer Price Index (PPI - 8:30), Consumer Sentiment (8:30)

As you can see, technical indications and news will be in control, at least until Friday.  That spells more of a pullback and mortgage bond pricing, resulting in slightly higher mortgage rates in all likelihood this week.  Keep in mind that Bernanke and Paulson are determined to get those mortgage rates down no matter the cost, and since it isn’t “their money”, chances are they will find a way to do it.  Plan on higher rates this week based on the charts, but don’t be surprised if news, or speeches, manage to enter the picture in an attempt to push bond prices higher.