Wednesday 2/4…Is it the Weekend Yet?

Yesterday mortgage backed securities sold off and have now given back all the gains from Monday.  Lenders rate sheets should be worse by about .25 in discount which would put par interest rates anywhere from 4.75% to 5.375%.  The only relevant piece of economic data today is the ISM services index.  This index gives investors insight into the strength of our non manufacturing segment of our economy.  Readings under 50 shows the economy is contracting and readings above 50 show an expanding economy.  Last month the number came in at 40.6 and economist’s are expecting it to come in today at 39.0.   A weaker number is seen as a positive for mbs and a stronger number a negative for mbs.   The report was just released and came in at 44.2 which still shows that our economy is in trouble but on the news mbs and treasuries have started to sell off.

Other then the ISM index we did hear from the Treasury this morning announcing a record amount of treasuries for auction over the next quarter.  The added supply of treasuries is hurting mortgage backed securities since they are both fixed income investments.  With the added supply, the price of treasuries is moving lower which causes the yield they pay to increase.  Since birds of a feather tend to flock together, treasuries are taking mbs with them. In the short term, things are not looking very promising for lower mortgage rates.  The government wants rates to be lower and they still have some things they can do to assist with that, but until some action is taken it will be very difficult for mbs to improve in the face of record treasury auctions that are needed to fund the spending/stimulus bill.  In a positive spin, it will also be pretty difficult for rates to get much worse then present levels.  Keep in mind, the Federal Reserve is still buying mbs and has over $425billion left to spend, so this should prevent a rapid and steep sell off.  We still have some major economic reports to come tomorrow and Friday that could change things quickly and I will bring you the news when it happens. 

After a brief and sudden sell off of mbs after the ISM number was released, we have stabilized and are currently where we closed yesterday.  If you do not have access to mbs pricing, keep an eye on treasuries for a sense of how the market is doing.  Currently the 10yr treasury is at a yield of 2.92, if that moves lower we should get some of the benefit in mbs pricing.   If you have been a reader of my blog, you know that mortgage rates are tied to mortgage backed securities and not treasuries.  However, they are both fixed income investments so they do trend in the same direction.  There are many instances of treasuries moving one way and mbs moving the opposite way.  Over the last couple weeks though, they have tracked each other pretty well with treasuries moving in bigger increments then mbs.   You can access live treasury prices through many free sources but to get live mbs pricing you must pay to get the data through several sources that are available and this is one of the reasons I say to keep an eye on treasuries today if you do not have access to mbs pricing.