What happened last week?
MBS Overview – Learn from the Past
Mortgage backed securities (MBS) gained +62 basis points (BPS) from last Friday’s close which caused 30 year fixed mortgage rates to decrease from the prior week. We saw the best rates on Wednesday and the worst rates on Tuesday.
This was a very volatile week with a huge spread of 203 BPS from highs to lows.
We had the “perfect storm” for a huge MBS rally on Wednesday with the combination of much weaker than expected domestic Retail Sales data and a big dash of concern over Europe as well as speculation about our own QE.
Germany and several other countries had weaker than expected manufacturing data. Traders were also concerned about deflation as year-over-year inflation was flat to even negative for about half of the European Union members. The European Central Bank has yet to start their asset purchase program that they promised would start this month. But major components of that plan are on hold as German courts (as well as 30K plaintiffs) say that it is against the rules of the ECB’s charter and/or Germany’s own rules. This caused many foreign investors to shift their money into U.S. bonds which helped our rates improve.
As mentioned, Retail Sales were weaker than expected (-0.3% vs estimate of -0.1%) but the rest of the economic data was strong with Initial Weekly Jobless Claims hitting their lowest level since April of 2000, Industrial Production shot up +1.0% (vs estimate of only 0.4%), Consumer Sentiment was very high at 86.4 and surprised to the upside, and the Fed’s Beige Book showed some upbeat progress in their 12 districts.
There were several interviews and speeches by different Federal Reserve presidents (not all of them are voting members of the FOMC). Much attention was paid to comments that ranged from QE4 needs to happen, that Treasury and MBS purchases should go on longer (they actually end this month), to nothing needs to change unless we see a real trend change. But there was no official announcement and their is no new policy for rates, etc.
What’s on the agenda for this week?
Intra-Day Lock Status: Neutral: Look for some very small pick ups today (maybe +6 to +19BPS) in pricing. MBS are likely to continue to trade at elevated levels for the week and will remain higher than where they were two weeks ago. However, those large intra-day movements upward last week (which failed) are not in the cards for this week.
This is a very light week for economic data and no major Treasury auctions to contend with.
The major momentum for pricing is once again likely to be global events, which will drive money either into or out of our long-bonds. Here are a few key items to keep an eye on this week:
ECB: Started their covered bond buying program this morning (similar to US MBS, but a considerably smaller market) and the ECB will reveal how much it has bought each Monday afternoon (starting next week). However, they have already changed their mind and dropped and then re-added and changed the bonds eligible for this program causing those that loaded up on bonds in an attempt to front-run the ECB to take some losses on buying the wrong type of bonds.
Ebola: Yes, heightened concern over the readiness of the U.S. system to handle this scary virus was a small factor in improved pricing last week. But we start this week with news that most of the healthcare workers, friends and family of patient zero in Dallas have all now passed the 21 day threshold and are fine. We also have a new Ebola Czar and a new Pentagon readiness team.
Also on the Radar: ISIS, China’s Growth and their latest “stealth” bank bail out, oil prices, Hong Kong stand-off with China, Russia and Ukraine’s gas pipeline negotiations, Germany, and our own stock market.