Mortgage Rates



Prior to 8:30 economic releases the US bond and mortgage markets were under selling pressure; the 10 yr note yield at 2.04% +6 bp frm yesterday’s close and MBS prices down 12/32 (.37 bp) frm the close yesterday. Stock indexes were trading a little higher but not much.

At 8:30 weekly jobless claims were about unchanged from last week, -2K to 351K, the previous week claims were revised slightly, down 2K from 355K to 353K. Claims continue to reflect that employers, while still not hiring are not firing and cutting jobs. Jan personal income expected to be up 0.4% increased 0.3%; personal spending expected up 0.4% was up just 0.2%. The reaction to the data wasn’t much but treasuries early this morning were in wholesale selling mode on continuing improvement on Europe’s debt problems. The 10 yr shot up to 2.05% (+7 bp) and MBS prices at 9:00 -11/32 (.34 bp).

Comments from Italy’s Prime Minister Mario Monti this morning saying the worst may be over for the euro region’s most distressed bonds. He believes there will be a plan worked out by the end of this month to increase the firewall around the debt crisis in the EU. Meanwhile Germany is continuing to resist an increase in the bailout plans; Germany is saying it isn’t the time to increase the bailout fund. Today begins the EU leaders’ summit in Brussels. Italian bonds are improving, lessening the urgency to increase the firewall according the German government. Yesterday the ECB added more to the kitty than had been expected, adding to the current prevailing view that Europe may actually dodge the bullet. The safety trade into US treasuries is being unwound as investors are less concerned that defaults will occur. All that said, it is still a moving target that can swing from one extreme to another in a blink of an eye.

At 9:30 the DJIA opened +50, the 10 yr -21/32 to 2.05% and MBS prices -11/32 (.34 bp).

Two data points at 10:00; the Feb ISM manufacturing index was thought to be at 54.6 frm 54.1 in Jan, it fell to 52.4. New orders fell to 54.9 frm 57.6 and employment index fell to 53.2 frm 54.3. The initial reaction to the weak ISM data pulled stock indexes down from 60 to 26 and the 10 yr note from -21/32 to -14/32, mortgage prices at 9:30 -11/32 (.34 bp) at 10:05 +8/32 (.25 bp). Jan construction spending was expected up 1.0% as reported it fell to -0.1%, the first decline in construction spending since last July.

Yesterday Ben Bernanke essentially implied the Fed isn’t likely to ease again by purchasing MBSs or treasuries; given the reaction in the rate markets it appeared there were more than a few betting that the Fed would do another QE. No easing and more positive news from Europe are combining to push interest rates higher as traders and investors step away from long bond positions.

Since the beginning of November the bellwether 10 yr has spent 90% of the time in the range between 2.10% and 1.90%, 20 basis points over 4 months. Mortgage rates also in a very narrow range, about 12 basis points in rates. This morning the 10 yr at 2.05% is at the top of the range, we expect the range will continue to hold. If however circumstances push the 10 over 2.10% then the last port in the storm is 2.15%. Although the Fed isn’t going to ease again, it will continue to keep short rates low (Fed funds) and in turn keep the long end and mortgage rates from increasing much.