Mortgage Rates



The stock market weaker this morning, the bond market strong. Yesterday the 10 yr note yield climbed to the support area at 1.70% (1.69%) and held; mortgage markets were very strong yesterday outpacing the 10 yr note in price improvement. This morning the 10 yr note started up 23/32 at 1.56% -8 bp and mortgage prices at 8:30 up 8/32 (.25 bp) frm yesterday’s close. In a running timeline; at 9:00 the 10 yr 1.57% -7bp, mortgage prices on 30s +8/32 (.25 bp). At 9:30 the DJIA opened -45, NASDAQ -12; the 10 yr note at 1.57% -7 bp and 30 yr MBS price +6/32 (.18 bp) frm yesterday’s strong close.

It isn’t much of a secret that the global economy is slowing rapidly due primarily to the Europe debt crisis; China cut rates yesterday for the first time since 2008 to spur growth, on June 5th Australia cut its base rate but the ECB still unable to act as it is impotent in dealing with Europe’s debt mess, didn’t lower rates but said the door is open. Here in the US yesterday Bernanke testified in Congress and said the Fed policy makers will discuss later this month whether to do more to spur growth, though he said the steps they could take may have “diminishing returns.” The FOMC meeting is on June 19th and 20th with increasing numbers believing the Fed will come up with some easing plan----but to what avail? The Fed is out of bullets, even Bernanke is sending that message with is “diminishing return” comment.

JPMorgan Chase economists say the global economy will grow 1.7% this quarter and 2% in Q3, after expanding at an annual pace of 2.5% in the final quarter of 2011. Lower interest rates that may occur if the Fed does more easing will have minimal impact on the economy and growth; rates are not the issue now, it is about fear and uncertainty that Europe may not solve its debt problems without help from non-Europe countries, so far there is no appetite at the IMF to help the fumbling leaders in the EU and ECB. Germany holds the keys in Europe and isn’t likely to budge on its conviction that austerity cuts in the debt ridden countries of Spain, Greece, Portugal, Ireland and next up Italy. Checkmate! Today a European Central Bank Governing Council member said that while the ECB still has tools to help Europe’s economy withstand the crisis it won’t act in isolation from other European institutions. Over the weekend Euro finance chiefs plan weekend talks on a potential aid request frm Spain to shore up the nation’s lenders.

Presently the idea the Fed will likely ease again is seen as an extension of Operation Twist that is set to end at the end of the month. The Fed selling short dated maturities and simultaneously buying long dated maturities in an effort to keep long rates low. Is it needed to keep rates low? Right now no. With global money flowing into US treasures US 10 yr and 30 yr maturities will continue to stay low, however the Fed is the only game in town; Congress and the Administration are not functioning, unable to add fiscal help.

For at least the next two weeks interest rate and stock markets will likely trade in their present levels; not expecting new lows in rates, nor much increase. Starting on June 17th through June 20th, four days that will likely set the tone for financial markets through the rest of the summer. On the 17th Greece will vote on what is in a way a referendum on whether it stays or leaves the Union; right now polls indicate Greece will vote to stay. On the 18th there is a G-20 meeting in Mexico that will focus on the global economic decline and possibly a unified global plan to alleviate the debt crisis in Europe that is rapidly breaking the backs of most banks in the region. A few reports floating now that to take Europe away from the cliff it stands on, it will require coordinated global assistance. On the 19th and 20th the FOMC meeting with its policy statement on the 20th and Bernanke’s press conference.

No major data points today; at 8:30 the April US trade deficit was reported at -$50.1B about what was expected; March deficit was revised slightly higher to -$52.6B from -$51.8B. At 10:00 April wholesale inventories were thought to be up 0.5%, as reported inventories increased 0.6%, sales were up 1.1%, there is a 1.17 month supply based on sales.

As long as the 10 yr note can trade under 1.70% the near outlook for rates remains positive; that said though, as noted above, we are not expecting new lows in rates over the next couple of weeks. Mortgage prices continue to hold positive outlook; to change that the 30 yr FNMA 3.0 coupon would have to close below 104-3/32 (104.09 bp), presently 104-30/32 (104.93 bp) on the July coupon. We expect choppy two way trading over the next two weeks with little overall change in rates.