Mortgage Rates Lower As Markets Show Signs of Correction

By: Victor Burek

Mortgage backed securities(MBS) lost more ground yesterday following a  10 year treasury auction that saw good demand but was hampered by the market's stipulation for higher yields.  Investors knowledge of more debt to come from the government is allowing market participants to demand higher returns (simple supply/demand fundamentals).  Unfortunately, since treasuries are the benchmark used to compare MBS returns too, the higher yield on treasuries is forcing MBS investors to demand higher yields on mortgage investments, consequently pushing mortgage rates higher. 

 

We do have some economic data this morning.   First, the U.S. Department of Commerce reported retail sales numbers for May.   The report indicated that retail sales had a nice rebound from last month’s revised for the better 0.2% decline, to post a 0.5% increase pretty much in line with expectations.  When excluding auto sales from the numbers, sales showed a better than expected 0.5% rise.   Part of the increase in retail sales can be attributed to increased gasoline prices but none the less, retail sales posted its first positive gain in 3 months.   On a year over year basis, the overall sales numbers still show a 9.6% decline which is an improvement over April’s 10% decline.  When excluding auto sales the decline is unchanged at down 7.3% year over year.    This report does give some validation to the optimistic investors seeing the end of the recession in the not too distant future; however, one report does not set a trend. 

 

Next is the weekly jobless claims from the Department of Labor.   First time claims for unemployment benefits eased quite a bit coming in at 601,000 while economists had predicted 625,000.  Last week’s numbers were revised worse from 621,000 to 625,000, so claims dipped by 24,000 week over week.  This does give credence to the worst of jobs lost is behind us.  Offsetting this positive report though is the continuing claims numbers which totals the number of Americans who continue to file for lack of finding a new job.  It has set a new record high coming in at 6.816 million and with last week’s number being revised worse, this is the 19th consecutive week of record continuing claims.  So, the pace of jobs loss is easing but it is still extremely difficult to find a new job.

 

The retail sales and jobless claims are both positive economic reports and stocks reflect that with moderate gains (we think stocks losing steam).   Usually, with optimistic economic reports, you would see MBS and treasuries sell off to fund the equity investments(this is the flow of money we refer to), so far this has not happened this morning because trading technical's are overriding market fundamentals (turning point upon us?)

 

We also received a backward looking report on business inventories this morning.  Investors would rather look forward so this data was essentially overlooked.  However, business inventories are the total dollar amount of inventory held by manufacturers, wholesalers and retailers.  A declining inventory points to a declining economy while a rising inventory points to a growing economy.  Why would a business increase inventory if they felt sales would decline?  Economists had expected a drawdown in inventories by -0.8% but the number came in worse at a -1.1% decline.  If not for being so backward looking, this would be a positive for MBS. 

 

Later today, the U.S. Department of Treasury will have their last auction for the week.  At 1pm, they will auction $11billion in 30 year bonds.  The Treasury department issues everything from 4 week terms to 30 year terms.  Treasuries with terms under 2 years are known as bills, terms of 2 to 10 years are notes and terms more than 10 year are referred to as bonds.  So when you hear the term long bond, they are referring to the 30 year treasury bond.  The MBS Commentary blog will have complete coverage once the auction is complete.   Like other auctions, the supply is known in advance so the most important aspect will be the overall demand and the demand from foreign bidders, aka indirect bids.

 

Since rate sheets have been issued this morning, MBS coupons have posted some notable gains. Remember: as MBS move higher in price, lenders can pass along better mortgage rates, which is exactly what we are seeing happen this morning.  If you are trying to decide whether to lock or float, make sure you check back with the MBS Commentary as they will inform you as to any potential risk of reprice for the better or worse.   

 

On a side note, WE ARE IN THE GREEN!!!!!  Wooohoooo.   MBS are performing like the Boston Red Sox against the New York Yankees.  (Vic 1, Brian 0)