Thursday 2/19…Every time We Start to Rally, Treasuries Pressure us Lower

Yesterday mortgage backed securities traded in a tight range and closed lower by about .125 in discount.  When I say it closed down by .125 in discount what that means is a par interest rate yesterday will now cost .125 to secure.  So far this morning, mbs are being pressured even lower due to a big selloff in treasuries.  Currently we are down another .25 in discount, which should put par interest rates anywhere from 4.75 to 5.125% depending on the lender.

This morning we did get the release of several economic reports.  First, we got weekly jobless claims and it continues to show the jobs outlook to be very weak.  Claims for the week came in slightly higher at 627,000 and the continuing claims has set a new record high with 4.987 million people continuing to receive unemployment benefits.  Generally speaking higher unemployment is a positive for mbs and lower mortgage rates.  Next we got inflation numbers in the form of producer price index which measures the change in price that producers pay for a fixed basket of goods.  This report is not as impacting as consumer inflation due to producers sometimes do not pass the higher prices to the consumer.  The overall number came in at a month over month increase of .8% when economists where only expecting a .2% increase.  The core reading which excludes food and energy from the numbers showed a month over month increase of .4% when economists where only expecting a .1% increase.  In general, these numbers are a negative for mortgage backed securities but the feeling on the street is this is just a blimp.  Yesterday, we got the release of the fed minutes from the last fed meeting and they showed no concern for inflation by the feds.  Of greater concern is deflation so a little inflation is not a bad thing.  Also, investors put more weight into consumer inflation so on the news there was not much reaction.  Next, we got the release of Leading Indicators, economists where expecting a 0.1% reading but the number came in at 0.4% increase.  This report is a forecast for the strength of the economy and with the stimulus bill being just passed this too is probably just a blimp on the screen.  I think most of us will agree that the economy is still not looking good and the labor market continues to decline.  This report historically carries little weight with investors.  Lastly, we got the philly fed index which is a measure of the strength of the manufacturing segment of our economy in the Philadelphia region.  Economists where expecting a decline of -25.0; however, the number came in much worse at a -41.3.  Usually we would see a rally in mbs on this data, but today that did not happen.  The day is still young, plenty of time for things to change for the positive.  Remember a negative reading shows a contracting economy and a positive reading shows expansion. 

Later today we have two treasury auctions of 2 year and 5 year treasury notes.  With the spending/stimulus bill that was just passed, the government has to come up with almost $800 billion and how they do that is by issuing treasuries for sale.  The added supply of debt on the market will continue to pressure treasury prices lower which are bringing mbs lower with them.  This is the law of supply and demand, with more supply available for sale the price moves lower.  Currently, the yield on the 10 year treasury is at 2.82, if you see that number fall we will probably see mbs move with them to the better which will help rates improve.  If you do not have access to live mbs pricing, keep an eye on treasuries for a sense of how mbs are doing as it appears we are taking our direction from them today.  As the price of treasuries or mbs move higher, the yield moves lower and vice versa.  If you are currently shopping for a mortgage, you want the price of mbs to move higher which results in lower mortgage rates.

I will get back to you later today if we see any big movement in mortgage rates.  Currently, we are off the lows of the day but still down on the day overall.  Early reports from fellow loan officers show lenders rate sheets about .25 worse in discount from opening rate sheets yesterday.  One lender actually improved rates on 15 year mortgages, bringing the par 15 year fixed down to 4.375%.