Yesterday, prices of mortgage backed securities (MBS) moved lower increasing consumer borrowing costs by .125 to .375 in discount.  Most lenders sent out reprices for the worse after bond market's were disappointed by the FOMC statement.    First, the wording of the statement indicated a bottoming of the current economic downturn.  This created optimism in the stock market and allowed investors to move from fixed income investments to riskier equity positions.  Second, the lack of verbiage indicating the Fed would boost their Treasury buying program added steam to the recent supply stimulated selling (huge amount of treasuries that will come to market to fund the ever growing deficit) of treasury securities. Following the release of the FOMC statement Treasury yields climbed considerably  .   Currently, the benchmark 10 year treasury is trading at a yield of 3.13 when just a week or so ago it was in  2.85 range.  Since MBS and Treasuries are both fixed income investments, they tend to trade in similar direction.  So, when treasury yields rise so do mortgage rates; however, the extent of the move has been much larger with Treasuries than MBS because of Federal Reserve support of mortgage rates

Onto the data for the day.

The first report of the morning comes from the US Labor department in the form of the weekly jobless claims.   Expectations were for first time jobless claims to show that 640,000 Americans to have filed for unemployment insurance which would be equal to last week's numbers.   In good news, initial claims were lower than expected at 631,000 for the week of April 25th.  It appears that the pace of job losses is decreasing.  The bad news, continuing claims has set another all time high record of 6.271 million Americans that are continuing to file for unemployment insurance due to the lack of finding a new job.  So, the pace of job losses appears to be easing but it is still very difficult for Americans to find a new job. 

Next, the Department of Commerce released Personal Incomes and Outlays Report.   This report lets investors know how much consumers are making and spending on a monthly basis.  Personal income and consumer spending in March both fell further than economists expectations.  Personal income was down .3% and spending was down .2%.  Economists had expected income to only decline .2% and spending to come in flat at 0.0%.   If consumers are making less money, they will spend less money, so this report is negative for the stock market and positive for MBS.   As part of this report we also get a measure on inflation in the form of the Personal Consumption Expenditure.    The headline PCE index was unchanged after last month's .3% increase while the core, which strips out food and energy, came in at a .2% increase matching economists expectations.   Year over year, the core PCE held steady at  1.8% well within the Fed's comfort zone for this index.  Once again, another report showing inflation not to be a problem today

Lastly, we got the release of Chicago PMI which gives investors an idea of the strength or weakness in our manufacturing segment of our economy.   This report is a good indicator of future inflationary pressures as a strong manufacturing sector generally indicates a strong economy which leads to higher inflation.   Readings above 50 indicate an expanding manufacturing sector and readings below 50 indicate a contracting sector.   The release showed the index to have jumped almost 10 points from last month's reading of 31.4 to 40.1!  As the Fed said yesterday that the rate of our economy slowing is easing and this report is confirming that belief.   After the release MBS have moved to the lows of the day.  As MBS move lower, consumer borrowing costs increase.

The downward pressure on MBS and treasuries is continuing this morning as the stock market enjoys another 3 digit rally.  Currently, MBS are trading in a choppy range,  slightly lower than yesterday's close. This should allow most lenders to continue to offer 30 year fixed rate mortgages in the 4.500% to 4.875% range for the best qualified consumers. 

For intraday updates on the movement of MBS, jump over to the MBS Commentary blog.