So I read through the FOMC minutes. The tone I took from the Board of Governors was....WE ARENT REALLY SURE WHAT IS GOING TO HAPPEN BUT THE ECONOMY IS REEEEAAALLY FRAGILE.
Here are some excerpts from the text (minutes and summary of projections) illustrating my perspective:
"Participants agreed that the information received since the March meeting provided some tentative evidence that the pace of contraction in real economic activity was starting to diminish."
"Although the near-term economic outlook had improved modestly since March, participants emphasized the tentative nature of the incoming data, which are volatile and subject to revision."
"Moreover, participants continued to see significant downside risks to the economic outlook. In particular, while financial strains and risk spreads had lessened somewhat over the intermeeting period, participants agreed that the global financial system remained vulnerable to further shocks."
"Looking further ahead, participants considered a number of factors that would be likely to restrain the pace of economic recovery over the medium term. Strains in credit markets were expected to recede only gradually as financial institutions continued to rebuild their capital and remained cautious in their approach to asset-liability management, especially given that the outlook for credit performance was likely to improve slowly"
"Almost all participants viewed the near-term outlook for economic activity as having weakened relative to the projections they made at the time of the January FOMC meeting"
"Participants shared the judgment that their projections of future economic activity and unemployment continued to be subject to greater-than-average uncertainty"
Here is an illustration of the outlook.....
Why is this Relevant to Mortgage Watchers?
"Members also agreed that it would be appropriate to continue making purchases in accordance with the amounts that had previously been announced--that is, up to $1.25 trillion of agency MBS and up to $200 billion of agency debt by the end of this year, and up to $300 billion of Treasury securities by autumn. Some members noted that a further increase in the total amount of purchases might well be warranted at some point to spur a more rapid pace of recovery; all members concurred with waiting to see how the economy and financial conditions respond to the policy actions already in train before deciding whether to adjust the size or timing of asset purchases."
So if things get worse...the Fed knows what it has to do to provide stability...dont forget there is still almost $800bn left in the Fed's MBS bank account.
The Reaction....
Plain and Simple: the uncertainty pouring out of the FED should serve to keep the broad market's bias DEFENSIVE...this implies stocks and bonds will remain range bound with a profit protective posture moderating SHORT TERM gains (MORE SELLING INTO STRENGTH!!!!). Better than expected economic reports will be looked at with skepticism as market participants remain doubtful of their accuracy. (Data revisions will move money). Worse than expected economic reports will evoke a panic driven run to risk averse assets like Treasury bills and notes...but technical traders wont let bargain basement prices last long. RANGE BOUND RANGE BOUND RANGE BOUND....RING THE REGISTER!!!
Mortgage rates are slightly off their record lows. Loan production is slow as originators battle long term times, HVCC, LLPAs, FICOs, and tightening underwriting guidelines...all while dealing with a herd of consumers who think rates aren't low enough.
REMINDER: Lenders have proven their lax attitude on letting rates go lower than 4.50%....OVER AND OVER AGAIN. If your pipeline is empty or filled with floaters...educate your clients dont sell them. The Fed is definetly providing a huge amount of support to the mortgage market....but the road ahead is very unclear and the market is weighing their inflation expectations against the looming TSY bubble and a financial market recovery.
Currently the MBS market is moving sideways in a price driven market (technical). . Yes...if pessimism overwhelms optimism, TSYs yields could potentially go lower and MBS prices might test their record price highs...BUT...that doesnt mean lenders are going to move rates much lower than what we have already seen.
Originators: stay defensive with your pipelines...
Borrowers: if you are a fence sitter...stop it...ubmit an application. Getting your loan looked at by a professional will accomplish several objectives. First it will provide you with a realistic idea of where mortgage rates really stand. Note: You cannot use rate surveys as your basis for thinking you deserve a lower rate. Every borrower is unique. Each consumer has different risks tied to their credit profile...those risks are accounted for in your interest rate. Getting your application submitted will put you in the position to be educated on how those risk adjusters effect your borrowing costs...plus having your loan submitted will give you the opportunity to take advantage of the 1 or 2 day period that lenders decide to offer those low rates you are expecting...AND...it will ensure your loan process is smoother because you wont be rushed. (4.500% for a perfect borrower is almost as good as it gets by the way). At least submit and application....
So far today....
The TSY market is digesting the $101bn supply announcement/correcting itself after its recent rally (taking profits into the strength) which is giving "up in coupon" MBS the opportunity to cheapen up. Rate sheet influential MBS coupons are feeling the force of par-nertia...range bound bias remains...even as stocks sell.
Since 5 pm "Going Out" Marks....
FN30________________________________
FN 4.0 -------->>>> -0-03 to 100-03 from 100-06
FN 4.5 -------->>>> -0-03 to 101-28 from 101-31
FN 5.0 -------->>>> -0-03 to 102-28 from 102-31
FN 5.5 -------->>>> -0-03 to 103-21 from 103-24
FN 6.0 -------->>>> -0-03 to 104-23 from 104-26
GN30________________________________
GN 4.0 -------->>>> -0-02 to 100-00 from 100-02
GN 4.5 -------->>>> -0-03 to 101-31 from 102-02
GN 5.0 -------->>>> -0-03 to 103-14 from 103-17
GN 5.5 -------->>>> -0-05 to 104-01 from 104-06
GN 6.0 -------->>>> -0-07 to 104-15 from 104-22
UST10YR: -0-01 yielding 3.204%
2s/10s: 234.77 bps
Dow Futures: -149 at 8272
The MBS/TSY weakness wont last long...the range will moderate. YAWN
MBS Market Alerts
