Mortgage backed securities (MBS) continue to receive fantastic international demand which will give us great support and probably some very small gains over Friday’s close. On a weekly basis, we expect a little “choppiness” due to our own economic data but we don’t expect to get materially hurt as the “fear factor” premium will limit any downside. A maximum of -20 to -40 basis point range on the downside, while a +19BPS is the likely maximum upside.
MBS Overview
This is a big week for economic data with the two biggest events being Durable Goods Orders and GDP.
The headline Durable Goods Orders is expected to spike up to 6.9 which would be the best reading since 2007. However, almost all of that is in the Transportation sector. If you strip out Transports, the reading is expected to hit only 0.6.
We get our first revision to the 2nd quarter GDP data. If you recall, the preliminary reading was a very strong 4.0%. The size of the revision upward or downward can have a big impact on pricing.
There are three short to mid-term Treasury auctions this week:
08/26 – 2 year note
08/27 – 5 year note
08/28 – 7 year note
All should continue to see very strong demand but are unlikely to impact mortgage rates as these are too short-term compared to the 30 year bonds that back mortgages.
The Federal Reserves “triggers” for beginning to raise their Fed Fund Rate are labor and inflation. Last week was all about labor. This week is inflation as we get our PCE data on Friday. The magic number on a YOY (year over year) basis is anything above 2.00%.
Of course, the major driver for pricing will once again be international events as the “fear factor” premium in long-bonds is present and at elevated levels. Any change in the three major conflicts (Ukraine, Israel, and Iraq) could cause some volatility for rates.
What happened last week?
MBS Overview – Learn from the Past
MBS lost -31 basis points (BPS) from last Friday’s close which caused 30 year fixed mortgage rates to move slightly higher from the prior week. The best rates were on Monday and the worst rates on Wednesday.
There were two major events last week that the long-market was focused on and both provided almost no momentum to pricing. The minutes from the last FOMC meeting were released on Wednesday and contained no real surprises. Federal Reserve Chair Janet Yellen gave a speech on Friday that focused on the labor market and it also contained no surprises as she made it clear that the labor market is improving and that the Fed is not on a pre-defined course to raise rates and is very “data-dependent.” Essentially, she said that if the labor market improves faster than the Fed has projected, then their first Fed Fund rate increase will be sooner. If the labor market weakens, then the rate hike will be further out.
The housing market received better than expected news. The NAHB Housing Market Index was hotter than expected with a reading of 55, New Housing Starts broke above a million units (1.093M), and Existing Home Sale increased to 5.15M which was much better than the consensus estimates of 5.01M.