Mortgage Market Update

Wow, mortgage backed securities finally changed direction, even if just for a bit.  I hope you all were paying close attention and were able to help your clients cash in on the correction.  Just how long is it going to last though?

Last week did not have a lot of data coming in so it relied a lot on technical factors and the direction of stocks mostly.  In the previous weeks, bonds have done very little besides fall down a steep slope, so a move higher was needed just to bring reality back into the mix.  The move higher is likely unsustainable, but more on that later.

Looking at the past week, oil prices continued to climb, even when the Saudis said they would increase production.  Of course, the strike in Nigeria didn’t help either.  Add to the mix talks from Israel about preemptive strikes on Iran’s nuclear plants and you can see why oil is dropping.  Since oil prices are part of the inflationary battle, bonds did not like the news.

However, things were not all bad for bonds as they did climb, fueled by more fears of a slow economy.  The manufacturing sector showed weakness, the Philadelphia Fed Index missed expectations, and more write downs from CItigroup all aided in giving bonds a much needed boost.  By the end of the week, mortgage rates were down a little, about .125%

Don’t let your guard down as the future does not look bright for bonds.  For starters, the move higher is likely just a correction as bonds failed to break resistance on Friday and remain below their downward trend line.  Focusing on upcoming reports, disaster could lurk in the data next week, with the PCE (Fed’s favorite gauge on inflation) coming Friday.  And who can forget that Fed day is Wednesday?

• Tuesday:  Consumer Confidence (10:00)
• Wednesday:  Durable Goods Orders (8:30), New Home Sales (10:00), Crude Inventories (10:30), FOMC Meeting (2:15)
• Thursday:  Initial Jobless Claims (8:30), GDP (8:30), Chain Deflator (8:30), Existing Home Sales (10:00)
• Friday:  Personal Consumption Expenditures Index (PCE) (8:30), Personal Spending (8:30), Personal Income (8:30)

As you can see, this week will be a wild ride for the mortgage market.  A tame start will allow the potential for gains before the next potential move lower, likely starting on Tuesday.  The Fed is not likely to raise rates and that could be bad news for bonds.  The end of the week will be another sign of inflation, potentially showing it growing which will send bonds even lower if it does.  The other news will provide insight into the housing market and some on the economy’s strength.

Technically speaking, bonds are still leaning toward the oversold side of the spectrum, but they remain in their downward trend.  Without any catalyst to break the trend, the recent move higher will be a needed correction and the downward trend will resume shortly.  I would start the week off cautiously floating if bonds open higher, but be ready to lock as the trend lower resumes.

(FYI:  I am expecting to complete my book on mortgage market analysis next month, so expect more details on it soon)

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