Mortgage Rates Continue to Rise Without Fed's Support

Mortgage rates improved a few basis points yesterday morning following a much weaker than forecast ADP employment number. However, as the day progressed and the reality of the Fed exiting the mortgage backed securities market sunk in, prices of MBS started to drift lower....and lower. MBS ended up closing at their weakest levels of the day, forcing lenders to recall rate sheets and reissues new ones with higher consumer borrowing costs. 

Onto the economic data of the day…

First out was weekly Jobless Claims.  This data provides three measures on the health of the labor market:

1. Initial Jobless Claims:  totals the number of Americans who filed for first time unemployment benefits

2. Continued Claims:  totals the number of Americans who continue to file for benefits due to an inability to find a new job

3. Extended Benefits:  totals the number of Americans who have exhausted their traditional benefits and are now receiving emergency benefits

Since our economy is driven by consumer spending, economists track employment data to get a sense of future economic momentum. Higher jobless claims lead to less consumer spending, which is bad for the overall economy but generally helpful in keeping mortgage rates from rising.  No trend of improvement has developed in jobless claims data. They have been very "up and down" lately.

New claims for unemployment insurance benefits fell 6,000 to 439,000 in the week ending March 27, 2010, this was the third consecutive week initial jobless claims moved lower.  Economists were expecting a decline to 440,000, so this was a slightly bigger improvement than expected but well within the range of forecasts.  Continued claims fell by 6,000 to 4.66 million.   The number of Americans who’ve used up their traditional benefits and are now collecting Emergency/Extended Benefits increased by 264,000 to 6.04 million.

Jobless Claims appear to be showing signs of easing, unfortunately stubbornly high continued claims and the use of emergency/extended benefits tells us job seekers are having a hard landing a new job.  For more on this report and the Fed’s exit from the market, read AQ’s opening commentary.  READ MORE.

The next report to be released came from the Institute for Supply Management, the ISM Manufacturing Index.  This is a survey of more than 300 manufacturing firms on the strength of business conditions.  Readings above 50 indicate expanding or improving conditions while readings below 50 indicate contraction.   The ISM index has held above 50 for the last seven releases; however, last month’s report came in lower than expected but that was attributed to winter weather.  Economists surveyed prior to this morning’s report expected the index to decline from last month’s read of 56.5 to a print of 56.3.  The actual report indicated business conditions improved much more than expected with a read of 59.6!  This is the highest print in more than three years.

The  final report on the day was Construction Spending.  This data shows the monthly change in the amount of money spent on construction for public and private residential and non residential projects. In February,  Construction spending declined 0.6%. This was the fourth consecutive month over month contraction in construction spending and the 34th decline in the last 48 months. Residential construction has fallen in 39 of the last 48 months. AQ asks, isn't this a good thing? READ MORE

Finally, today the Department of Treasury announced the size of next week’s debt offering.  As expected, they will offer up $82 billion in new US government debt.   We get $8 billion 10 year inflation protected notes on Monday, $40 billion 3 year notes on Tuesday, $21 billion 10 year notes on Wednesday, $13 billion 30 year bonds on Thursday.  The added debt coming to market is expected to restrain any rebound rally we see in benchmark yields over the next week, which keeps mortgage rates from falling. However, I should say the direction Treasury yields take in the next few days is far more reliant on the release of the Employment Situation Report tomorrow morning.

Reports from fellow mortgage professionals indicate lender rate sheets to be considerably worse than yesterday.  The par 30 year conventional rate mortgage has risen to the 5.00% to 5.25% range for well qualified consumers.  To secure a par interest rate on a conventional mortgage you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including an estimated one point loan origination/discount/broker fee.  You may elect to pay less in fees and secure a higher interest rate or you may elect to pay additional discount points to buy a lower interest rate. 

Hopefully you have followed my advice on locking… if so, well done.   If you didn’t, the damage has been done and lender rate sheets reflect it.   I feel at this point it might be worthwhile to float through the Employment Situation Report tomorrow morning.  This is a risky strategy as a better than expected non-farm payroll report will  cause rates to rise and, as you know, mortgage rates rise faster than the fall.   If you want to remove all risk, nothing wrong with locking a 30 year fixed rate mortgage in the low 5’s.  The stock market is closed for Good Friday, but the bond market will be open until 12.