Mortgage Rates Have Muted Reaction to FOMC Statement

Well the big event for the week and month came and went with no reaction.  The FOMC meeting concluded yesterday with the release of their policy statement.  No surprise announcements and the verbiage was little changed from last statement.   Many a mortgage professional was hoping for some announcement that would spark a major rally to get rates back below 5%, but no such announcement was included, after reading there was a feeling of  disappointment due to the lack of housing verbiage.   Maybe the Fed believes that housing can correct with mortgage rates in the mid  5% range which is still incredible, historically speaking.  If you would like to read an excellent analysis of the Fed statement, check out AQ’s blog last night by CLICKING HERE. 

We have some economic data hitting the wires this morning.  First on the slate is jobless claims which totals the number of Americans that filed for first time unemployment benefits for the prior week.  Recent reports have shown an easing in the loss of jobs, but today’s report indicates a sizable increase over expectations.  First time claims for the week of June 20 came in at 627,000 when expectations called for only 613,000.  Last week’s numbers were also revised worse by an additional 4000 claims.  The continuing claims, which totals the number of Americans that continue to file for benefits due to the lack of finding a new job, also moved higher by 29,000 to 6.738 million.  Following the release of this report, mortgage backed securities started to move higher on the day.  As MBS move higher, consumer borrowing costs move lower.

Next came the release of the final revisions to first quarter Gross Domestic Product(GDP).  We receive three reading for GDP.  First is the initial reading, than revised reading and the final reading which we received this morning.    The Commerce Department reported that final first quarter GDP was revised slightly better at a contraction of 5.5%.  Economist’s expectations was for the final reading to be -5.7% matching the revised reading we received last month.   Since this report is showing what happened last quarter, the better than expected number had no impact on the markets.  As part of this report, we get a reading on inflation which once again shows that inflation is not a concern as of today.  The FOMC statement yesterday reiterated that inflation is in check for the foreseeable future but they did add some caution due to the recent run up in oil prices.

Also this morning  Federal Reserve Chairman Ben Bernanke is testifying on Capitol Hill regarding the acquisition of Merrill Lynch by Bank of America.   There is some suspicion  that he forced Bank of America into the acquisition of Merrill against their will and asked that they hold back important information regarding losses at Merrill.   Any time Mr. Bernanke speaks, investors will be paying attention as his words can move the markets.   Any major news items from the testimony will be covered in detail by Matt and AQ.

The final news worthy item today is the last treasury auction.  Today at 1pm eastern, the Treasury Department will auction $27billion in 7 year treasury notes.  The first two auctions of the week were met with very good demand especially by indirect bids.  Indirect bids measure demand from foreign investors which is one of the key factors that determine whether the auction is successful or not. Weak demand can cause treasury yields to move higher which will apply pressure on mortgage rates to follow. 

Early reports from fellow mortgage professionals are indicating that rates are slightly better this morning.  The par 30 year fixed rate mortgage has fallen to the 5.125% to 5.375% range for the best qualified consumers.  In order to qualify you must have a FICO credit score 740 or higher, a loan to value 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee.

Since the release of the jobless numbers which helped MBS to move higher on the day, they are starting to give back the gains.  The direction of MBS will be dictated by the movement of treasuries.  This is clearly evident when comparing on a graph of the two.  In order for MBS to move higher today(as MBS move higher in price, mortgage rates move lower), we need treasuries to move lower in yield.  Currently the benchmark 10 year treasury note is trading at a yield of 3.70 after touching 3.66 earlier this morning.  When treasuries were at the low yield of the day, MBS were at their best levels.  Matt and AQ inform me that 3.70 is a key level to maintain as it is a ceiling of resistance that will hopefully prevent the 10 year treasury note from moving higher.  The auction at 1pm will be very crucial as weak demand will apply a lot of pressure on treasury yields to move higher and maybe through the key 3.70 ceiling.  If we break above that key level, it might be a good sign to lock your loan as we are seeing the best rates of the week today.  If you are currently floating your rate, check in with the MBS Commentary blog.  They will inform you if reprices for the worse are imminent.