MBS MORNING: PATIENCE IS A VIRTUE

By: • Thu, Feb 19 2009, 11:16 AM

Good Morning MBS world..

Looming Supply of Treasury debt weighs on bond markets this morning. Stocks initially were cheered as " better than expected" jobs data and less than expected "disinflation" data were announced. Since then equity markets have been reminded of the general weakness surrounding the global economy.

Looming Treasury Supply...

Stocks and Bonds...

The steepening TSY yield curve is dragging MBS down with it this morning. Early in the session newly issued mortgage backed securities were holding their ground against the supply weary TSY curve, however at around 1130AM TSY yields began to fall and the yield curve started outperforming MBS. Currently spreads are about 1 tick wider to TSYs and two ticks wider to swaps. If TSY improve MBS should follow the general direction of TSY bids

1210pm marks

FN30__________________________________

FN 4.5 -------->>>> -0-05 to 100-28 from 101-01

FN 5.0 -------->>>> -0-03 to 101-31 from 102-02

FN 5.5 -------->>>> -0-02 to 102-17 from 102-19

FN 6.0 -------->>>> -0-02 to 103-04 from 103-06

If you are wondering WHY THE STIMULUS PACKAGE AND HOUSING PLAN are not driving rates lower...

REMEMBER: we haven't gotten any specific details about either plan yet. These unknowns will stall the "down in coupon" pace....it is however clear that recent political actions have added anxiety to the "up in coupon" day trading profit taking strategy. For MBS traders 6.0s and 6.5 coupons are on the cuspy side of the prepay curve (higher prepay risk) so don't look for traders to venture too far from the belly of the stack right now. This will translate into an MBS investor focus on "whatever yield they can get"....5.5s are still an acceptable buy, but 5.0s seem to offer the safest sanctuary from prepay risk.

Look for periods of better than expected investor rate sheets and anticipate periods of worse than expected rate sheets. The "worse than expected" rate sheets should follow the periods of "better than expected" rate sheets bc of MBS markets reaction to supply)...these erratic pricing strategies will continue to prevail over primary mortgage rates until we learn more about the Obama Administrations Efforts to save the world.

Borrowers: if you are expecting 4.0 and 4.5 mortgage rates RIGHT NOW....then you are expecting too much. The process of reaching "ITSNBN" mortgage rate levels will take time...there are several market participant's objectives that must align before this process CAN occur. Be patient with your mortgage professionals...they want low rates just as bad as you do! Keep in close contact with your mortgage professional because THERE WILL BE SHORT PERIODS OF GOOD MORTGAGE RATES while the MBS market sorts out its differences with the primary mortgage market.

ITSNBN = reader coined acronym for "it that shall not be named"

Morning Economics (my favorite)

This morning INFLATION is getting a little spotlight attention after the Producer Price Index data was higher than expected. Lets break it down....

Producer Price Index

Press Release: www.bls.gov/ppi

What: PPI measures the changes in prices that manufacturers and wholesalers pay for goods during different stages of production. If businesses have to pay more for the materials they use to produce their widgets ...they are mostly likely going to pass along those additional costs to you...the consumer.

The Producer Price Index is broken down into three progressive stages of production. Crude Goods, Intermediate Goods, and Finished Goods. Finished goods is considered Headline Producer Inflation. The cost to produce a finished goods is affected by the cost of the entire production cycle so one should note which stage of production is adding the most cost to the final product.

Crude Goods: raw materials like commodities. Susceptible to supply shocks ( Oil crisis during summer of 2008)

Intermediate Good: partly finished good used in production of another good. Good has already undergone some transformational processing. (paper, car parts, fabrics)

Finished Goods: good that is ready to be sold to consumer. Inflation at this stage in the production process is usually passed along to the consumer

Core PPI: strips out the volatile costs of food and energy

Headline PPI: includes food and energy costs

January 2009 PPI Data: http://www.bls.gov/news.release/ppi.nr0.htm

Consensus PPI: 0.2% (vs. -1.9% in December)

Consensus Core PPI: 0.1% (vs. 0.2% in December)

Actual PPI: 0.8% (-1.3% YoY)

Actual Core PPI: 0.4% (4.2% YoY)

Excerpts from Press Release:

"The Producer Price Index for Crude Materials for Further Processing fell 2.9 percent in January following a 5.3-percent decline in December."

"In January, lower prices for crude energy materials outweighed higher prices for crude foodstuffs and feedstuffs and for crude nonfood materials less energy.
"....partially offsetting the faster rate of decline in the crude energy materials index, prices for crude petroleum declined 12.5 percent in January after falling 31.0 percent a month earlier

"The Producer Price Index for Intermediate Materials, Supplies, and Components fell 0.7 percent in January following a 4.2-percent decrease in December."

"Prices for materials for durable manufacturing, intermediate foods and feeds, and materials and components for construction all declined less than they had a month earlier, while the indexes for intermediate energy goods and materials for nondurable manufacturing turned up in January."

"The Producer Price Index for Finished Goods rose 0.8 percent in January....This increase followed declines of 1.9 percent in December and 2.5 percent in November... "

"The upturn in the index for finished goods was led by the index for energy goods, which increased 3.7 percent after falling 9.1 percent in December"
"The index for gasoline increased 15.0 percent after dropping 26.2 percent in the preceding month."
"partially offsetting the upturn in finished energy goods prices, the rise in the index for residential electric power slowed to 0.3 percent from 0.5 percent in December"

You can blame higher energy prices for the higher than expected Headline PPI numbers. The increases in the Core data was due to increases in prices for Toys, Sporting Goods, and Small Arms. The volatile Pharmaceutical Index also increased 1.1%.

Plain and Simple: Stop thinking about inflation. Put it out of your mind!!! Bernanke has already pointed out SEVERAL means by which to reign in inflation once this crisis is subdued and growth resumes. Until then worry about the problem at hand...if we don't slow the pace contraction a DEFLATIONARY SPIRAL will be your next "problem at hand". Look at that chart...does that look like we should be worried about inflation right now?

What SHOULD BE getting all the attention is JOBLESS CLAIMS!!!!

Weekly Jobless Claims (for Unemployment Insurance)

Press Release: www.ows.doleta.gov/unemploy/claims_arch.asp

Consensus New Claims: 620,000 (vs. 623,000 last week)

Actual New Claims: 627,000 New Jobless Claims (continually increasing = bad)

Actual Continuing Claims: +170,000 to 4.987million.....THAT'S ALMOST 5 MILLION (continually increasing = bad)

Did you know that labor economists estimate that around 10% of initial claim applications are rejected? So there's more????

Excerpts from Press Release:

"In the week ending Feb. 14, the advance figure for seasonally adjusted initial claims was 627,000, unchanged from the previous week's revised figure of 627,000. The 4-week moving average was 619,000, an increase of 10,500 from the previous week's revised average of 608,500.

The advance seasonally adjusted insured unemployment rate was 3.7 percent for the week ending Feb. 7, an increase of 0.1 percentage point from the prior week's unrevised rate of 3.6 percent.

The advance number for seasonally adjusted insured unemployment during the week ending Feb. 7 was 4,987,000, an increase of 170,000 from the preceding week's revised level of 4,817,000. The 4-week moving average was 4,839,500, an increase of 92,500 from the preceding week's revised average of 4,747,000."

Plain and Simple: The market for jobs in the US is VERY VERY VERY weak. Jobs drive consumer spending and consumer spending drives GDP growth. Weak Jobs market = weak economy!!! By the way Continuing Claims managed to continue its streak of record breaking numbers (4^th week in a row).

We should all be more worried about aggregate demand than inflation!

Rate sheets are WORSE this morning....ERRATIC PRICING FOLLOWING THE PERIODS OF GOOD PRICING!!!!