What happened last week?
MBS Overview – Learn from the Past
Mortgage backed securities (MBS) lost -40 basis points (BPS) from last Friday’s close which caused 30 year fixed mortgage rates to move higher from the prior week. The best rates were on Tuesday and the worst rates on Wednesday. So far for the month of February, MBS are down an incredible -229 BPS which has caused mortgage rates to increase.
Even though there was another weekly sell off, it is a positive sign that our support levels are holding.
We had a holiday-shortened week. There were no Treasury auctions and our domestic economic data had little to no impact on long bond trades (which control interest rates). The FOMC released the minutes from their last meeting which received a lot of attention but really didn’t provide any real momentum for bonds.
The bond market primarily focused on overseas events last week with Greece and Ukraine in the spotlight (once again). One of the biggest factors in mortgage rates being so low (compared to historical norms) is global fear and the flight to U.S. long bonds as a safety play. So any reduction in global fear will take away some of that premium in our bonds.
Two weeks ago we got a cease-fire deal between Ukraine and the Russian Separatists which went into effect last week and reduced (temporarily) some risk premium in MBS.
With Greece, we finally got an official announcement straight out of Brussels on Friday. Greece and its euro zone creditors reached a deal to extend Greece’s bailout for four months. Greece has until Monday (which is a national holiday over there) to list the planned measures it intends to take. It is surprising that Germany has agreed to an open-framework of this nature, which also means that once the final memorandum is available, everyone will dissect the language to find out just who folded. Regardless, MBS sold off on Friday in direct response to this announcement which gave us our highest mortgage rates since December 30th.
What’s on the agenda for this week?
This is a big week for housing news with a bevy of reports which include: Existing Home Sales, Pending Home Sales, Case-Shiller Home Price Index and New Home Sales. None of these reports are likely to have an impact on mortgage rates (i.e., MBS trades) but will give us a report card on the state of our housing industry.
We also have some more U.S. debt that will hit the open market with three days of Treasury auctions:
-02/24 2 year note
-02/25 5 year note
-02/26 7 year note
We will get two big reports that focus on consumers with Consumer Confidence (last month saw a historical high reading) and Consumer Sentiment. Both reports have been at elevated levels but we simply haven’t seen that translate into more spending yet.
As far as domestic economic data, the two biggest releases are Thursdays Durable Goods Orders and Friday’s GDP revision. The market is expecting the preliminary 4th quarter GDP reading to be downgraded from 2.6% to 2.1%. The higher the actual number is above 2.1%, the worse it is for MBS pricing.
The bond market will be paying very close attention to Fed Chair Janet Yellen’s semi-annual monetary policy testimony before the Senate Banking Committee on Tuesday and the House’s Financial Services Committee on Wednesday. The market will be paying close attention to how the Fed reconciles its current zero rate policy and potential rate increases with the pace of current economic growth and international headwinds.