THE MORNING AFTER ......................................2/8/08

If you were a mortgage broker or mortgage consumer yesterday, you couldn't help but notice what was one of the worst sell off we've seen in months.  Rates worsened by about .5 discount points. 

Despite bond-friendly economic data, analysts attributed the sell off to extremely weak demand at the US 30 year T-bill auction.  Some said traders were obviously concerned about bonds given the high likelihood of future fed rate cuts.  Why would rate cuts be bad for mortgage rates you ask?  In a word: inflation.  The concern is that if rates get too low (cheap credit), that it could lead to increased inflation.

Remember that bonds, a fixed income security, lose value in direct proportion with inflation.  If something is less valuable, less people will want to buy it (which is what we saw yesterday).  If less people are buying bonds, then the holders of bonds lower the price to entice demand.  And a lower price on bonds means a higher yield.  And yields on Mortgage Backed Securities (bonds), vary directly with mortgage rates.

Today is light on economic data, but high on buzz.

RBC's CASH index which tracks consumer spending is reading very low at 48.5, whereas 100.00 is the baseline for the index.  The rest of the buzz surrounds recession concerns, inflation concerns, and the anticipated impact of the Stimulus Plan which was approved by the senate yesterday.

Yet again, it appears that the market does not quite know what to do with itself.  We're in "wait and see" mode yet again.  The potential for "lemmingism" is as high as it has been in recent months.  So if a slight momentum builds in one direction or the other, be ready to act.  We hope the momentum is bond-friendly.  This would consist of reassurance about inflation coupled with more indications of recession.

If the stimulus plan is heralded as a market savior, mortgage rates are going up.  I do not think it will be extremely well received, but that is no guarantee rates will go down.  The general sentiments on growth and inflation seem to be the key players in the bond market.  Historically, prices are so close to all time lows that there is resistance to going lower.  In other words, good news for bonds will lower rates at a much slower rate than bad news for bonds will raise the rates.

I hope that makes sense and I hope you are ready to lock today if the lemmings head off the cliff again.  Currently, MBS's are up 3-5/32nds.  This won't help us much this morning, but at least we're not sliding down the hill.

Stay tuned, watch the market, and be ready to act.