After the huge rally we had Wednesday following the Fed announcement of more mortgage backed security buying(MBS) and the start of buying of longer term treasuries, MBS have given back some of the gains over the last couple days of the week.  Lenders came out with real aggressive pricing on Thursday which lead to many consumers locking their loans.   With the huge influx of locks, lenders to control pipelines started to reprice for the worse much more than the price decline in mortgage backed securities justified.  We saw this same thing happen earlier this year when rates dropped dramatically.

The week ahead is pretty light on economic data but we do have a couple big impacting reports coming out later in the week.

Monday

-          Existing Home sales, economists expecting an annual pace of 4.50 million.  This report measures the pace of existing home sales across the US.  Since MBS prefer more moderate growth, they tend to improve with a lower reading.  When MBS improve in price, the yield lowers which results in lower mortgage rates.

Tuesday

-          2-Yr US Treasury Note Auction.  The added supply of debt available for sale might pressure treasury yields higher which can pull mortgage rates higher as well.   Since treasuries and MBS are both fixed income debt investments, they trend in the same direction.   I would like to see high demand at this auction especially from foreign investors.  High demand tends to increase price which results in lower yields.

Wednesday

-          Durable Goods Orders, economists expecting a -2.0% decline after last months -5.2% decline.  This report measures the change in new orders placed with domestic manufactures for immediate and future delivery of goods they produce.  A lower reading is seen as a positive for mbs and tends to lead to lower mortgage rates.

-          New Home Sales, economists expecting an annual pace of 315,000 after last months record low pace of 309,000.  This report measures the number of newly constructed homes which were placed under contract.  Since higher homes sales generally lead to higher spending(consumers must fill the new home with appliances, furniture), the stock market prefers a higher reading which can pull money out of MBS and into the equity markets.  When money is pulled out of MBS, their price declines which leads to higher yields and higher rates.

-          5-Yr US Treasury Note Auction.  The added supply of debt available for sale might pressure treasury yields higher which can pull mortgage rates higher as well.  Again, high foreign demand for our treasuries would be seen as a positive for MBS.

Thursday

-          Gross Domestic Product(GDP), economists expecting a contraction of -6.6% decline after last quarters contraction of -6.2%.  This report is the broadest measure of total economic activity in our economy.  MBS tend to rally with a lower reading. 

-          Jobless Claims, economists expecting 650,000 people to have filed for unemployment last week after the prior weeks reading of 646,000.  Higher unemployment allows companies to keep and to hire new employees without offering higher pay which keeps wage based inflation in check.  The biggest enemy to low mortgage rates is inflation.

Friday

-          Personal Income and Outlays, economists expecting personal income to have dropped -0.2% after last months increase of 0.4%.  Consumer spending expected to show a increase of 0.3% after last months 0.6% increase and the headline PCE(Personal Consumption Expenditure) is expected to show an increase of 0.2% after last months 0.1% increase.   The PCE index measures inflation on the consumer level, so a lower reading is seen as a positive for MBS and tends to lead to lower mortgage rates

-          Consumer Sentiment, economists expecting a reading of 56.7 after last months 56.6.  This report is a survey of 500 households on their financial conditions and attitudes about the economy.  Since consumer spending makes up the vast majority of your economy, a higher reading is seen as a positive for the economy so MBS prefer a lower reading.

So far this morning, MBS are basically unchanged from close on Friday.  Early reports from fellow mortgage professionals are showing par 30 year conventional mortgages to be anywhere from 4.625% to 4.875% depending on the lender.  Later today we are supposed to get an announcement from Secretary of the Treasury Tim Geithner regarding the government plan to remove “toxic assets” off the banks balance sheet.  Rumors of this plan where announced over the weekend and the stock market is rallying on the news.   Some details have already been released and more are expected.  If you would like to read these details <CLICK HERE>.

Just in, got the release of existing home sales and the actual number came in better than expected at an annual pace of 4.72 million which is up 5.1% from the prior month.   So far, not much reaction in the markets after the release.  Currently the Dow is up 200, the 10 yr T-note is at a yield of 2.61 and MBS are up 2 ticks on the day.  I will get back to you later today if we have any significant movement.