Last week, prices of mortgage backed securities (MBS) made marginal improvements which allowed lenders to push rates slightly lower by Friday.  To remind existing blog watchers and notify new readers, mortgage rates offered by lenders are based on the MBS trading in the secondary market.  As demand for MBS increases, the price to buy them also increases which helps reduces mortgage rates.   In normal market conditions ,worse than expected economic data is generally helpful in lowering mortgage rates while better than expected economic data is negative. The current fixed income market is however heavily reliant upon the artificial demand side support of the Federal Reserve, so often times MBS and Treasuries react in a less volatile manner as they normally would....

The week ahead is not as action packed as last week but we do get some relevant reports and another Treasury auction announcement...

Monday

-           The only relevant piece of data today is the Housing Market Index which provides investors insight into the demand for housing and also economic momentum.   Housing is seen as a major driving force of our economy and strong housing data is a good sign of future economic growth.  When a person buys a home, there is a lot of things that they will also buy to furnish the home from appliances to window treatments.  This report is released by the National Association of Home Builders and is a survey where home builders are asked to rate the economy and their view of the  current condition of the housing market.  Last month’s report surprised investors coming in higher than expected leading some to believe that the bottom of the housing downturn is at least in sight.  This report will be released at 1pm eastern. 

Tuesday

-          The U.S. Department of Commerce will release their monthly housing starts figures which measures the number of single family and multi-family residences that have begun construction.   Last month’s report showed housing starts to be on a yearly pace of 510,000 and economists’ surveyed are looking for this number to increase to 540,000.  A better than expected number might spark a rally in the stock market which would apply pressure on MBS to move lower in price increasing consumer costs.  Strong demand for housing is a positive signal for economic growth…

Wednesday

-           The Mortgage Bankers’ Association will release their Weekly Applications Index. This data set measures the number of applications for new loans at mortgage lenders.  This report’s affect on the market will be similar to the prior housing data we get on Monday and Tuesday.  An increasing number suggests demand for housing is increasing which would be positive for the stock market and could possible pressure MBS lower resulting in higher consumer borrowing costs.  Last week’s report was disappointing as it only showed a slight increase from the prior week even though mortgage rates continue to be at historic lows and housing prices have dramatically dropped.

-          The Federal Open Market Committee will release the minutes from the last Fed meeting.  As always, investors will thoroughly read these minutes for any insight into future monetary policy and the Fed’s outlook for the economy.    Since the Fed is very transparent, most of the information in this report will already be known. 

Thursday

-          The Department of Labor will release the weekly jobless claims numbers.   This report gives us a reading of the number of Americans who have filed for unemployment insurance for the first time.   Initial claims last week moved higher than anticipated to 637,000 causing many optimistic investors to rethink the idea of the recession being near its end.   Economists surveyed for this week’s report are estimating that 645,000 first time claims were filed last week.  A worse than expected number would be positive for MBS and lower mortgage rates.

-          Leading Indicators which is a composite index of 10 economic indicators that lead to economic growth.   Last month’s report came in at a -0.3% and economists’ surveyed for this month are predicting a rebound to a 1.0% reading. 

-          Philadelphia Fed Survey which gives investors an idea of the strength of the manufacturing segment of our economy around the Philadelphia area.   Readings below 0 indicate a contracting economic sector and readings above 0 indicate an expanding sector.    Economists’ surveyed are estimating a -20.0 reading following last month’s better than expected -24.4 reading.   Historically, this report has had a strong influence on MBS and a better than expected reading will apply pressure on MBS to move lower in price resulting in mortgage rates moving higher.

-          MORTGAGE RATES EVENT OF THE WEEK: The Treasury Department will announce the auction schedule of another $100bn + in 2 year/5 year/7 year Treasury notes. This announcement will likely moderate any Treasury/MBS gains this week.   The added supply of debt available for sale, will apply pressure on MBS and Treasuries to move lower in price. 

Friday

-           The markets will close early at 2pm eastern time in observance of the Memorial Day weekend. 

Early reports from fellow mortgage professionals are showing par 30 year conventional rate mortgages in the 4.5% to 4.75% for the best qualified consumers.   In order to secure this rate, you must have a FICO credit score over 740, a loan to value at 80% or less and be willing to pay all closing costs associated with your loan including 1 point loan origination/discount/broker fee. 

Fixed income investors are in defensive mode ahead of Thursday's scheduled treasury supply announcement, that said it is going to be difficult for MBS to muster up the strength to move higher as most market participants will be quick to take profits after any appreciations to open positions.   At the moment, if you are floating for a closing in the near term it would make more sense for you to consider locking early in the week as the likely pre-TSY auction schedule release reactions will put added selling pressure on MBS...especially with a three day weekend ahead. 

For intraday updates to the price action of MBS and movement of mortgage rates, click over to the MBS Commentary blog.