MBS Morning: Yield Curve Flattening
Fn 4.0-> +0-01 to 100-27 Gn 4.0-> +0-10+ at 101-09
Fn 4.5-> -0-01 to 102-06 Gn 4.5-> -0-01 to 102-27+
Fn 5.0-> -0-01+ to 102-31 Gn 5.0-> -0-03 to 103-18+
Fn 5.5-> -0-01 to 103-13 Gn 5.5-> -0-06 to 103-27
Fn 6.0-> +0-00+ to 103-23+ Gn 6.0-> -0-03 to 103-27
Good Morning MBS followers. Class A settlement done.
Yesterday the Federal Reserve was attracted to higher yielding coupons...more specifically the 6 handle (range). This is in line with our slower than anticipated prepayment speed expectations and should continue to contribute to periods of modest relative value retracements while we slowly progress towards the "top of the mountain"...in this case the top of the mountain being 4.00% primary mortgage rates. We are happy to have the roll behind us and are looking forward to some primary/secondary spread tightening. Based on recent queries and our daily discussions with the country's finest mortgage bankers and brokers we must re-iterate that the journey to the "top of the mountain" will be unhurried...unfortunately as has been passionately discussed we are at the mercy of lenders.
That said we have been monitoring the full gamut of investor rate sheets and are consistently updating our hedging models to identify new pricing trends. As we continue to gather information we are optimistic that regularities will emerge and our crystal ball will be filled with new visions...until then we will do our best to provide you with timely information on MBS movements and re-price notifications. MBStradamus we remain....
Originator supply (what loan officers lock in that eventually becomes MBS) has been minimal so far today. As the yield curve flattens out the MBS stack has gapped up to TSYs and is slightly tighter to swaps. The long end of the yield curve looks to be providing some duration for portfolio manager while the 10yr TSY is a great source of liquidity. So for those of you who gauge mortgage rates off of the 10 yr TSY stop it...flight to quality isn't just in short term bills and notes anymore!
Since I am an economist at heart....here is the data
US Import prices fell 4.2% in December following a revised (for the worse) 7.0% decline in November. YoY import prices 9.3% which is sadly the largest yearly decline since forever (well since keeping track anyway). It should be noted that the culprit of this record setting decline has been the precipitous fall of energy prices. Excluding Petroleum imports, prices only fell 1.1% in December and 1.8% in November. So we went from a commodity driven period of stagflation to a commodity based period of deflation in less than one year.
December Retail Sales fell 2.7%...way worse than the 1.2% decline economists were expecting. Sales fell in pretty much every category except for marginal increases in health care/personal care and miscellaneous store retailers. Clothing sales dropped by 2.5% and department store sales fell 2.3%. Gas stations got worked...their sales fell 15.9% as fuel prices have been radically reduced by the lack of demand. Since the July peak in crude oil prices gas station sales have declined 42.1%. On the bright side auto sales only fell 0.7%...yiippeee!!!!! Before we make any deflationary comments we will need to re-access US price levels...mark Jan.30 on your calendar for advance Q4 GDP and PCE estimates.
Just a brief opinion: If you are a Bernanke hater you are not being fair....steering a $16 trillion economy through two extreme ends of the "financial crisis spectrum" is no straightforward task...especially in an election year.
Speaking of the Federal Reserve... non voter Charles Plosser had some comments regarding the excessive government spending that has and will continue to prop up the US economy. He noted that the Fed "must clearly articulate the boundaries of future lending to reduce the moral hazard we have created." Thanks Charles...Ben just added that to his "honey do" list. Charlie also believes that Q4 GDP will fall much more than Q3 GDP and that he expects the current recession to be the longest since the World War II era, but he doesn't anticipate the unemployment to reach double digit levels (AQ comment: it REALLY is already in double digits Charles). Lastly he expects housing to hit bottom this year.... "finally". Oh darn it Plosser!!! You totally discredited yourself....Charles just said that "a great deal of uncertainty surrounds any forecast today." Sorry I feel like I just waste 2 min of your life by reading this last paragraph.
Rate sheets are slightly better today....