Thursday 6/26/08 ........ A Really Terrific Thursday!

By: Matthew Graham •
In A Word:

Esoteric metaphors aside, as long as you could read the words "keep floating" yesterday, you will be a happy camper today.  So far the 6.0 bond has pushed over a third of a point higher from yesterday's open, half a point higher from yesterday's lows, and slightly over an eighth higher from yesterday's close.  Despite only being an eighth higher, because of the way lenders hedge pricing on Fed Day, current price levels could be good for more than an eighth of improvement this morning.  We'll probably start with an eighth most places, but there is more "potential" in the numbers still (as long as they hold).

The Why:
Much of today's why pertains to the extensive discussion of yesterday's post-announcement action.  We did, in fact, have decent buying overnight from Asia.  Treasuries are, in fact, tracking well with lower coupon rates, and over PAR coupons are still finding a bit of resistance to moving higher.  Still, the weak opening in stocks (Dow down 133), combined with the absence of outright inflation panic cannot help but push the entire stack slightly higher this morning, though treasuries are outperforming a bit.

The Numbers:

 6.0% FNMA is up between 2 and 4 32nds at 100-12 to 100-14 (I give the range because it's moved around quite a bit in the last few minutes)

6.5% FNMA is up 2/32nds at 102-15

 
The News:

  •     Corporate Profits
    •  down 3.6% bringing the year over year reading to the lowest in 7 year
    • This is not normally a big impact report, but it is certainly "fuel on the fire." 
    • Also, this can drive the stock market to a larger extent, which in turn can affect money flow in the bond market
  • GDP
    • Rose at a 1% annual rate, exactly as forecast
    • improved exports, likely thanks to a weaker dollar helped the figure
    • Housing hurt the figure
    • Although this is "growth," it is anemic, and as any of the potential impact of stimulus checks fades, concern remains for contraction in the third quarter
    • The PCE (personal consumption expenditures, which is the Fed's preferred measure of inflation) came in at 2.3%.  Bernanke and co. would prefer that number to be under 2%, but although there are signs of cost pressures, it's not as bad as it could be considering the recent inflation-hawkishness
  • Jobless Claims
    • The street expected this report to be high today and it was even slightly higher
    • 384,000 new claimants filed for unemployment compared to estimates of 380,000
    • Though not enough of a deviation from expectations to rock the boat too much, this is still bad news for stocks and good news for bonds. 
    • The figure also keeps continuing claims at historically high negative territory above 3 million at 3.139 million
  • Existing home sales
    • Up 2.0% at 4.99mil, this was almost bang on with expectations of 5.0mil
    • As such, the 2% increase is not quite the headline shocker some news outlets will make it out to be today, but if anyone needs a PR campaign, it's the housing market
    • This will not have an appreciable impact on MBS today and never usually does unless wildly deviant from expectations
    • Still, it's a step in the right direction for the housing market, (although prices fell) and it's nice to see economists predictions be more accurate regarding the housing market.  This suggests that at least some toes in some waters are beginning to be able to "feel the bottom" even if it's a bit deeper than they'd like.
  • Still on tap is the Money Supply report later this afternoon--not normally a big market mover, but it can have an impact nonetheless.
  • In "off-the-docket" news, some heavyweight stocks including Citi and GE are being downgraded by analysts, adding to the woes for stocks. 

Conclusion:

First, I'd like to extend a heartfelt Thank You to those who gave feedback to yesterday's lengthy request.  A Thank You is due as well even to those who were unable to respond yet for simply being readers of this site.  We are nothing without you and yesterday's request for feedback is intended to have a democratic "vote" of sorts as to how the content of the site will move forward.  Based on the responses we've reviewed so far, it appears that there will be something for everyone in our new model, all the way from some free content and very cheap basic memberships to high level contact possibly even the CHOICE (not required!) to get a live feed of MBS prices and other top-shelf services as a la carte items.  All in all, it should be a high degree of customizability.  For almost all of you, the product should be significantly better.  Those of you that like the writing style, content, etc... will still always have access to that, and the other 3 of you that didn't want Dragon and Ninja analogies can just get straight to a plain white screen with a short list of black numbers with no color commentary. 
 
All joking aside, thank you again.  Our only goal is to deliver as many of you as possible more of what you want and less of what you don't.  We couldn't do that without your feedback!  To that end, if you haven't yet chimed in, we are trying to do a "head count" of sorts.  We know how many visitors we get, but we NEED to hear feedback from all of you, even if it's just a one sentence email!  If you haven't had a chance yet, please either go here  and follow the instructions or, at the very least, shoot a quick email to info@mortgagenewsdaily.com with as much feedback as you have time to give.  Please ensure MBS FEEDBACK is somewhere in the subject line.  Sorry to ask for yet more of your reading energy for feedback, but ultimately, it should benefit all of us.   
 
Getting back to today's conclusion, it seems that most lenders priced about halfway up the curve of the price improvements we had this morning.  Since we have fallen back a bit, that's just about right.  If there are no more improvements, the .125 to .25 in YSP you are seeing now may be all we get.  The fact that downgrades are affecting financials is a potential complicating factor for the MBS spread widening out this morning (as quality perception decreases/risk perception increases, treasuries become preferred to MBS, so fewer buy MBS, the prices rise less slowly than treasuries, and thus the spread "widens" or "gaps"). 

Lock or Float:

Despite that "gappiness" issue, floating still makes sense this morning.  With stocks at their current levels, plus considering all the recent detractors from MBS, such as inflation and quality concerns, and the fact that spread (which results from NEGATIVE quality perception of MBS, right?) is still well above historical highs, we have some room to close the gap, especially with some "less than horrible" readings on inflation.  Be aware though, that the simple possibility of spread tightening DOES NOT mean that mortgage rates will improve.  If the treasury prices decrease sharply, spread can tighten all it wants and MBS prices can still worsen.  So be sensitive to quickly changing sentiments in stocks and bonds, but as always, you'll need to come back and check the actual MBS performance to see if a lock is necessary.  Also as always, we will update you as soon as we see evidence for concern in the price curve.  And with your feedback, soon enough, the "refresh button" will be a thing of the past!

Thanks again and please continue to offer feedback until we have built the web's best MBS resource together!