Home Prices Continue to Fall, MBS improve again
Let's get straight to the news:
- Our favorite Home Price Index, Case-Shiller, released this morning, shows the sharpest decline in home prices since Robert Shiller created the index in 2001. Values were down 12.7% year over year.
- The dollar has strengthened to it's best levels against the Euro in three weeks. Traders are hopeful that the FOMC will indicate that future rate cuts are unlikely with the intent of addressing rising inflation. Remember a stronger dollar always benefits bonds, so this is a factor contributing to MBS improvement this morning.
- Countrywide reported almost a billion dollar loss due to bad loans. This is the third straight quarterly loss and is causing speculation to mount that Bank of America may reduce or cancel it's buyout offer. This is not affecting markets this morning, but is just something to keep an eye on. If the deal does go south, it could have a negative impact on MBS.
- Foreclosures doubled in the first quarter bringing the year over year change to 112%. It's always tough to interpret negative data when it comes to homes and home prices. On one hand, it speaks to a prolonged weakness in the economy as home equity is not available to finance consumer spending. That would be good for bonds and theoretically for MBS. On the other hand, homes are the asset that secure the mortgage that secures MBS. So record foreclosures speak to that asset devaluing and foreclosures cause increased write-downs. This can potentially create instability in the mortgage market causing rates to rise. It's a double edged sword, but the nice thing (if anything can be called such), is that this is not a surprise to traders. This weakness is baked into their cake long ago as they are employed by the firms that are doing the foreclosing. So they get to know about it long before we do. That's why we don't see foreclosure reports move the MBS market. The fallout from them hits gradually over time. For instance, if an MBS trade desk is employed by one of the huge broker dealers, such as Lehman Brothers, that desk will always already know about the amount of foreclosures that are affecting it's own portfolio and be trading accordingly, as will the rest of the dealers. So the risk and fallout is diffused gradually throughout the trading cycle.
- The financial news media is taking note of the relative stability we've enjoyed since Bernanke navigated the storm of Bear Stearns and the worst credit fears of the last 2 years. MBS have improved relative to treasuries. Though rates have gotten a bit higher all across the board, this "tightening" is good in the long run because if fixed income gains popularity again to the extent it enjoyed earlier this year, MBS will be running a closer race with treasuries (barring negative mortgage related headlines), which will make rates as low as we've seen them in a long time.
- In breaking news, the consumer confidence index declined to 62.3. This just happened so is not yet affecting MBS. The consensus was for 62.0, so analysts pretty much "nailed it." The raw data is very very poor, but the expectation accounted for that so this should not cause tremendous movement from here on out.
Whether it's driven by this data, or by the trading flow, MBS are better currently ranging from a quarter point in the 6.0% coupon to 10/32nds in the 5.0 coupon. This will be good for better rates this morning probably by about .25 YSP. All is quiet in anticipation of the FOMC's verbiage tomorrow. We know it will be a .25% cut, but we want to hear what they have to say about the future. If inflation is moderate and further rate cuts are unlikely, MBS will be happy. Whatever the case, if you float, you MUST be ready to act immediately for the rest of the week. That means lock requests filled out and on the fax, or online ready to submit.
A warning: we can see a lot of "back and forth" after a FOMC announcement, so I will just be reporting the facts of the MBS curve afterwards with no opinions or suggestions. The 5.5% coupon is currently at 100-11. This has been historically dangerous territory. There's no sense in locking yet, but do be ready for a sharp turn around. Either late tonight/early tomorrow or Friday will be the best day to lock this week. Friday is for risk takers that are confident they can navigate the announcement tomorrow and the earlier lock is for those of you who either have the ability to take that risk or who simply want to get decent sleep for the rest of the week.
Updates to this blog will not be available for the next several hours, but the good news is that the 10 year treasury is tracking very nicely with MBS this morning. Watch for a spike in the 10 year and you'll know it's time to lock. Start getting nervous if the yield rises .04% or more.
Until then, happy floating!