Mortgage Rates

Mortgage Rates Anthony Hood Equity Investment Capital Office: 949-891-0067 Email: tony@equityinvestmentcapital.com website: www.equityinvestmentcapital.com Building Strong, Lasting Relationships; One Client at a Time. Treasuries and mortgage markets saw a little selling yesterday with MBS 30 yr price down 19 bp. This morning markets are doing better, not much early but still better. With Bernanke’s speech tomorrow markets are trading in tight ranges this week; the 10 note in a 3 bp yield range and mortgages generally unchanged from last Friday, up 21 bp. At 8:30 this morning weekly jobless claims were reported unchanged from last week; last week was revised up from 372K to 374K. The 4 wk average of claims up 1500 frm last week. Unemployment claims over the last six weeks have been generally flat, from 360K to 374K; there are those that see the increase in claims as significant in terms of nudging the Fed to ease soon. There is little reason to see claims other than unchanged for the last six weeks. As for claims not falling translating to a reason for easing, there should be little disagreement that the Fed has no power to create jobs in this environment whether it eases or not. Consumer spending in the U.S. climbed in July for the first time in three months, increasing 0.4% and right on forecasts. July personal income up 0.3% also right on target. Because spending rose more than incomes, the saving rate fell to 4.2% from 4.3% in June, the highest level in a year. Two weeks ago July retail sales were up 0.8% setting the stage for today’s spending figures. In Europe an index of executive and consumer sentiment in the 17-nation euro area dropped to 86.1 from 87.9 in July, the European Commission in Brussels said today. That’s the lowest since August 2009. Economists had forecast a decline to 87.5. In Germany, jobless claims rose for a fifth month in August. Reports today showed retail sales in Japan fell 0.9% in July from a year earlier, more than economists’ forecast. Europe continues to drag the global economies down with the inability to deal decisively with sovereign debt problems. Three years with nothing but talk and dangling the hook out there that “next month” there will be progress; of course the outcome has been that Europe is bringing us down to its level as the economies of China, Japan and US among others. At 9:30 the DJIA opened -70, the lowest in the last 4 weeks, NASDAQ -16, S&P -8. The 10 yr note at 1.62% -3 bp , 30 yr MBS price up 18 bp frm yesterday’s close. The German central bank and the ECB’s Draghi continue to argue over the ECB plan to buy Spanish and Italian bonds to keep those countries’ debt cost from increasing. The Bundesbank argues that buying sovereign debt is against the EU treaty while Draghi believes it has the authority to do so. Draghi wrote an editorial piece yesterday in one of Germany’s popular weekly papers saying “A new architecture for the euro area is desirable to create sustained prosperity for all euro-area countries, and especially for Germany”…. “Yet this new architecture does not require a political union first. Economic integration and political integration can develop in parallel.” Lot of rhetoric from both sides of the debate, nothing unusual about that as it has been the key issue for the last month. On Sept 6th the ECB meeting will debate the issue of ECB bond buying, while on Sept 12th the German high court will rule over the legality of such a move. Tomorrow Bernanke will deliver the long awaited speech that two weeks ago was widely thought would signal another easing move. Now the consensus is that he will not send that signal of an imminent easing but simply reiterate what the FOMC minutes have stated for the last three meetings, that the Fed is prepared to move if the need arises. Based on recent data points the Fed won’t ease as long as the US economy is improving even at the current slow pace. At 1:00 this afternoon Treasury will auction $29B of 7 yr notes, based on the 2 yr and 5 yr auctions, the demand should be OK but not outstanding. The technical read on the bond market remains bullish, now trading under the 10 yr 20 and 40 day averages on the yield. The obvious question now is how much lower will long term interest rates fall? From a trading perspective we go with the flow, however, frm a fundamental point of view we don’t expect rates to fall much more; certainly we believe the lows of long term interest rates (mortgages and treasuries) have been seen when the 10 yr fell to 1.40% a month ago. As long as economic data confirms economic improvement, even slightly, the Fed has little reason to increase its balance sheet. These historically low interest rates engineered by the Fed haven’t added jobs or increased business spending. Why waste what bullets the Fed has left?