This Week
Mortgage Backed Securities Overview
This is a big week that starts off with the installation of Janet Yellen as the Chairperson of the Federal Reserve this morning. There are no major Treasury auctions like last week but there are a slew of “talking Feds.”
Domestically, this week is all about Friday’s Non-Farm Payroll report even though there will be some big-time economic releases such as ISM Manufacturing and Servicing early in the week.
Economic Data Highlights
Non-Farm Payroll: The market is expecting a reading of 175K but the focus is on that dismal reading of 74K last month – to see how much the upward revision is.
ISM: Chicago PMI was a pretty strong reading (59.6) and the market is expecting ISM to come in around 56.
Talking Feds:
02/03 Treasury Sec Lew (not a “Fed” but still important)
02/04 Lacker and Evans
02/05 Plosser and Lockhart
02/06 Rosengren
Of course, there are many more economic reports that will be closely watched (particularly ADP Private Payrolls, Construction Spending, et al). Each day this week there will be an economic release big enough to really impact pricing. There hasn’t been that type of calendar for quite some time.
Across the Pond
The market is still on heightened alert over the emerging markets. However, we did get some positive news out of Europe as factory output increased more than originally reported. Also, Greece showed an improvement in their PMI reading for the first time in 4 1/2 months. Combined, these are dampening some of the run to safety into anything U.S.
What Happened Last Week?
MBS Overview
Mortgage backed securities (MBS) gained +38 basis points (BPS) from last Friday’s close which caused 30-year fixed rates to move lower for the week. The best rates were on Friday and the worst rates on Tuesday.
Last week was one of those weeks where MBS should have lost major ground (higher rates for you) but fear from overseas sent cash in to U.S. bonds and temporarily overshadowed domestic events.
Economic Data
Domestically, the biggest event of the week was clearly the Federal Reserve’s decision to once again lower the amount of their monthly Treasury and MBS purchases down to $65 billion per month. As the Fed gradually purchases less and less bonds on a monthly basis, their impact on longer-term rates such as mortgages will be reduced.
There was a mixed bag of economic data. On the housing front, both Pending Home Sales and New Home Sales were weaker than expected. But we did see an all-time high for the median price of New Homes and the Case-Shiller Home Price Index continued to expand showing a 13.7% increase in prices over last year. Durable Goods Orders were much weaker than expected, but 4th quarter GDP was very strong at 3.2%. Both Chicago PMI and Consumer Sentiment were at very high levels and beat forecasts.
Across the Pond
Overshadowing everything and driving down mortgage rates was a complete “the sky is falling” fear-factor rally due to mounting concerns over the inability for emerging markets to raise capital and that means that they are circling the drain.
First up was China’s PMI data which showed the lowest rate of manufacturing in six months. Also, China’s bank system was a huge source of concern among investors. Puerto Rico, Argentina and Turkey were also in the spotlight as their bond yields shot up as investors are becoming very concerned about their ability to repay their debts. This all made any U.S. based bonds very attractive and caused our 10-year Treasury yield to tank and MBS prices to surge, and that gave us our lowest rates since November 27th.