Wednesday 10/2 ... Another day of bad economic reports

Today, our mortgage backed securities have opened higher and continue an upward trend, which is good news. We had the release of a couple economic reports which show continued weakness in our economy. First we had the release of the weekly jobless claims. Economists where expecting 475,000 but the number came in higher at 497,000. The more closely watched continuing claims has risen by 48,000 to 3.59 million which is the highest it has been since September of 2003. This continued weakness in jobs helps to keep wage based inflation in check so this report has helped mbs' improve today. Next, we had the release of factory orders where economists where expecting a drop of -1.8% but the number came in much worse at -4%. This is a sign of the continuing problems with companies obtaining credit, thus the need for the rescue bill to be passed.

Last night the Senate passed a new version of the $700 billion rescue plan by a vote of 74 to 25. The passage of this bill should help to reduce rates but we still need the House of Representatives to pass the bill. There is a lot of uncertainty of whether the house will pass it. Until this bill gets done, we will probably not see a big improvement to rates and investors are in wait and see mode.

In other news which also help improve mbs pricing is oil is down almost $4 and European economy is also struggling. We live today in a global economy, so as the global economy also is slowing which helps to reduce inflation. And as we have stated many times, the mortal enemy to mortgage rates is inflation as it eats away at the rate of return of your mortgage. You need to remember, your mortgage is an investment to some investor, so you might be paying a 6% rate of interest but that also means that some investor is earing a 6% return. As inflation rises, that 6% fixed return gets smaller and smaller. A lot of consumers have asked why are 15 year mortgages at a lower rate then 30 year mortgages? Well, since 15 years is a shorter term, there is less time for inflation to eat away at that fixed return, thus you get a lower rate.

Floating appears to be a very safe call but tomorrow brings us the big piece of chicken, the nonfarm payrolls. Economists are expecting a loss of 105,000 jobs and the unemployment rate to hold steady at 6.1%. We will let you know tomorrow the exact numbers.