Mid-Week Mortgage Rate Market Update

Oct 19, 2011

Prior to 8:30 mortgage prices traded down 6/32 (.18 bp) and the 10 yr -8/32 to 2.20%. At 8:30 Sept CPI increased 0.3% overall and when food and energy are removed up 0.1%; yr/yr CPI +3.9%, the core yr/yr up 2.0%. Yesterday’s PPI was stronger than expected increasing concerns that inflation may be increasing, today the CPI takes a little worry away but not totally. Also at 8:30 Sept housing starts and permits; starts were expected up 4.0% as reported starts increased 15.0%; permits were expected down 1.5% but declined 5.0%. Starts are a surprise, so much so that we question the data. Starts totaled 658K annually frm 572K in August; permits at 594K down from 625K in August. Single family starts were up 1.7% the rest was in multi-family starts (+50%). The initial reaction the the 8:30 data took the 10 yr down in price a little, mortgage prices at 8:45 -5/32 (.15 bp).


In Europe this morning, riots in Greece; protestors being gassed as it escalates. Yesterday’s maniacal reaction to a headline in a British newspaper that a deal was in the offing to increase the EFSF to re-capitalize the banks in the region sent markets into another round of excessive volatility. One hour after the news it became apparent that the news was woefully lacking in fact and substance. There is no plan that has been resolved. Markets, as noted yesterday, don’t wait for facts these days; it is all about headlines and in turn creates huge volatile swings.


Europe continues to drive global markets, every word out of the region is taken as the last word. There is still nothing of substance after over a year of discussions; Europe’s banks do not want to take the haircut that will likely be necessary. Most of the sovereign debt has to be taken as losses at least by 50% or more, banks will continue to fight it. Politicians here and there remain convinced a plan will be worked out that will stabilize Italy, Spain and Portugal as well as keeping Greece from default. The problem with that is, so far after all this time there is nothing. On Oct 23rd finance ministers from the G-20 countries will meet in a summit, at the moment its in the hands of Germany and France, the only two EU countries that are not in some way impaired. German Finance Minister Schaeuble hasn’t specified how much additional strength the European bailout fund may have and negotiators are still in “intensive discussions.” What’s new about that?


Early this morning the weekly MBA mortgage applications; the composite index declined 14.9%, purchase applications down 8.8% while re-finances declined 16.6%. Higher interest rates dropped the re-finance markets, purchases remain soft. There is an anomaly though, the week included Columbus Day, the few that are optimistic about the housing sector are making a lot out of the holiday, we don’t hold much to that. Any even small increase in mortgage rates shuts of the flow, mortgage rates and treasuries were higher last week.


At 9:30 this morning the DJIA opened -22, NASDAQ-12, S&P -3; the 10 yr note -6/32 to 2.19% +2 bp and mortgages unchanged. Until 9:30 mtg prices were generally off 4/32 (.12 bp).


The only other scheduled information today is at 2:00 when the Fed releases its Beige Book, the Fed’s detailed report on the economy in the 12 Fed districts. Always some meat in it but generally nothing shocking and new markets are not already thinking about—–that of course is if anyone is actually thinking these days rather than reacting.


Treasury and mortgage markets remain bearish; until the 10 yr can decline below 2.0% the bearish technicals will continue. That said, we remain confident that the 10 yr will find support at 2.30%, the recent high was 2.27% five sessions ago. The Fed’s Operation Twist is still out there and the Fed has increased MBS purchases. Interday and intraday volatility will continue following the paranoid equity markets. Already this morning 30 yr MBSs have traded in a .34 basis point range. The treasury market is being stretched between better equity markets and the need for safety as Europe is still in play; equity markets a little weaker early today keeping rate markets generally unchanged so far.

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