What happened last week?
MBS Overview – Learn from the Past
Mortgage backed securities (MBS) lost -18 basis points (BPS) from last Friday’s close which caused 30 year fixed mortgage rates to move slightly higher from the prior week on a very choppy session.
It was a choppy week, with MBS alternating gains and losses each day. The domestic economic data, while strong, did not materially impact pricing. Industrial Production, Capacity Utilization and the Leading Economic Indicators were slightly better than market expectations, while the Consumer Price Index showed no threat of inflation in the short run.
The biggest domestic news was Wednesday’s Federal Reserve meeting and policy statement followed by Fed Chair Janet Yellen’s live press conference.
Opposing views: The stock market rallied for three days as they focused on the Fed’s phrase “patience” to mean that any rate hike will be in late 2015 (if at all) and the stock market rallied on this perspective.
Meanwhile, long bond traders (which include MBS which set mortgage rates) are focusing on Janet Yellen’s prior comment that rate hikes could come 6 months after they announce the end of quarter combined with Wednesday’s comment that a rate hike could come “within the next couple of meetings.” By both metrics…that puts a rate hike announcement in April of 2015. Given the low inflation picture, long bond traders are moving that estimate to June. As a result, MBS have been under pressure from the Fed statement.
The two biggest international stories of the week were oil prices and the Russian ruble. Oil, Oil Oil: WTI may have found a temporary bottom as oil prices appear to have stabilized and made some small (very small) gains. But they are still trading in the mid 50s and these low prices are a positive for long bonds as they are anti-inflationary and helped to keep mortgage rates at fantastic levels last week.
The collapse of the Russian ruble is in direct response to the drop in oil prices and compounded by the international sanctions, and has caused international funds to move into the safety of U.S. bonds which also helps mortgage rates.
What’s on the agenda for this week?
With the Christmas holiday this week, expect strong demand for MBS as traders park their funds starting on Tuesday afternoon…so a major sell-off is simply not in the cards. It will take a weaker than expected Durable Goods Order and 3rd quarter GDP on Tuesday for MBS to push up above that mark. Oil should continue to provide strong support as well.
Bond Market Closes Early 2:00EST on Christmas Eve
Bond Market is Closed on Christmas
Bond Market is open on 12/26
Treasury Auctions This Week:
12/22 – 2 year note
12/23 – 5 year note
12/24 – 7 year note
This is a holiday shortened week which means there will be a lot of economic releases that are crammed into just a few trading sessions. The two biggest reports of the week are both on Tuesday. The third revision to the 3rd quarter GDP will hit and the market is expecting it to be revised from 3.9% to 4.1%. The higher the number, the worse it is for pricing. The next biggest report is the Durable Goods Orders, which has been very volatile as of late. The market is expecting some solid gains though. Again, the higher the number, the worse it is for pricing.
We start the week off with weaker than expected Existing Home Sales which fell 6.1%. The market was expecting 5.25M and we got 4.93M. And this reading is from November when fixed mortgage rates were at their all time lows, which reinforces that interest rates alone do not drive the housing market. MBS have had very little response so far this morning.
Oil is under pressure again, down -1.89% and testing the $56.00 level ($56.03). This will be a key level to watch. If Oil breaks below that mark into the low $55 area, it could help pricing.