If you read the blog yesterday, I stated that we were in need of a rally in treasury yields in order for prices of mortgage backed securities to improve before mortgage rates to could move lower.  Well, that is what happened.  The benchmark 10 year treasury note, after touching on 3.70 resistance in the morning, made a dramatic turnaround and by day’s end before closing near 3.50%.  Helping the cause was the last leg of this week's Treasury auctions. Yesterday the Treasury auctioned $27 billion of 7 yr notes. Indirect bids exceeded 65%, well above average, which was close to the demand record at the 2 and 5 yr note auctions on Tuesday and Wednesday respectively. Just before the auction, the 10yr was trading around 3.66 and MBS were slightly improved. After the auction a rally ensued and by day's end most lenders repriced for the better, unfortunately they were not willing to pass along all the improvements so borrowers and loan officers alike were somewhat disappointed.  In total, MBS improved by 75 basis points which would imply a mortgage rate costing 1 point in the morning would have only cost .25basis points by day’s end (give or take servicing and GSE fees).   To recap yesterday’s action, WOOHOOOO!!!!

This morning began with the Personal Income and Outlays report. This data set measures the increase or decrease in both personal income and spending.   Personal income for May was expected to post an improvement of  0.4%, when the numbers were released they indicated a sharp rise of 1.4%. This better than expected read follows  last month’s revised increase of 0.7%.  This big jump in income is being attributed to  onetime payments under the Obama administration's economic stimulus package, the  American Recovery and Reinvestment Act of 2009.  Many Americans received a check from Uncle Sam which boosted their income.  This report is indicating that consumers are making more money, but will it lead to more spending?  Consumer spending drives our economy and recent reports haven’t shown spending increasing as consumers are taking the additional income and saving the money.  Expectations called for spending to post a 0.3% improvement following last month’s -0.1% and the report came in right on expectations.  As part of this report we get another measure on inflation in the form of the Personal Consumption Expenditure.  This data set measures the price change for goods and services on the consumer level and is the Fed’s favorite gauge for inflation.   As expected, this report indicates the core PCE increased by 0.1% further evidencing that inflation is not a concern as of today.   Year over year, the core PCE index fell to 1.8% following last month’s 1.9% reading which is within the Fed’s comfort zone as they want PCE to stay under 2%.  All in all, this report indicates that consumers are making more money but their spending is not increasing at the same rate.  Where is it all going? Consumers are saving more money! The savings rate reached at 16 year high at 6.9%. This implies consumers are building a safety net in the event the economy has another downturn. Speaking of that...

The University of Michigan’s Consumer Sentiment index was released this morning. This data set surveys 500 households on their  outlook for financial conditions and attitude regarding the economy.  Recent sentiment and confidence reports have indicated that consumers are beginning to believe that the worst is behind us.  Economists surveyed expected this report to post a small increase to 69.7 following last month’s 69.0 reading. When the data was printed most were surprised to see that Consumer Sentiment has improved 1.8 points to 70.8. The 500 houses surveyed are apparently feeling more optimistic about our economy even though gas prices are on the rise and unemployment is  approaching 10%!! (Look at U-6 though which has the rate closer to 16%)

So far today the MBS market has been extremely quiet.  This is due to the big rally yesterday which brought out some profit takers this morning. Helping MBS prices move higher today is the continued down trend of treasury yields, the benchmark 10 year note is trading near 3.50%.  If treasuries can hold this trend or at least remain at current levels, we shouldn’t see a sell off in MBS.

Early reports from fellow mortgage professionals are indicating that rates are improved from yesterday with the par 30 year fixed rate mortgage in the 5% to 5.25% range for the best qualified consumers.   If you are currently floating your mortgage rate, please take into consideration that the rates being offered this morning are the best we have seen in a few weeks.  When rates were in the mid- 4’s, many consumers continued to float thinking rates would go lower and lost out after rates spiked on “Black Wednesday”.  Matt and AQ inform me that we are somewhat at a turning point and things could go either direction.