What Happened Last Week?
MBS Overview – Learn from the Past
Mortgage backed securities (MBS) gained +98 basis points (BPS) from last Friday’s close which caused mortgage rates to improve for the week.
The economic data took a back seat to the Federal Reserve as Janet Yellen and company delivered what the market considers are some very dovish comments.
There was something for everyone (hawkish/bearish or bullish/dovish) with the release of the latest policy statement from the Federal Reserve Open Market Committee (FOMC) and the following live press conference with Federal Reserve Chair Janet Yellen, but clearly the bond market focused on the dovish comments.
Here is a quick breakdown:
Hawkish: (at some point in modern history the Fed will raise rates…probably by September)
– Removal of the word “patient” – Fed stands ready to raise rates “after” the April meeting
– Fed doesn’t actually need 2% inflation before raising rates, they need to be “reasonably confident” on inflationary trending towards 2%
Dovish: (you wake up in Oz…it’s all in color and rates will never rise)
– Has changed their view on economic growth from “solid” down to “moderate”
– Lowered their 2015 GDP growth from the range of 2.6%-3.0% down to the range of 2.3% to 2.7%
– Mentioned improved labor conditions as measured by the Unemployment Rate and a slight decrease in the massive participation rate, but is concerned about “sluggish” wage inflation
– The stock market is not overvalued based upon “historical” valuation methods
Both stocks and bonds had massive rallies after the Fed release.
What’s on the Agenda for This Week?
FNMA MBS is receiving a lot of support and some small gains over last week’s Fed infused rally. We have uber low inflation with oil prices in the toilet and there is mounting fear over Greece’s unwillingness to meet the very basic requirements to tap into the last traunch of money as part of their bail out deal.
Domestically the biggest releases will be Thursday’s Durable Goods Orders, which has seen some wild swings as of late, and Friday’s final revision to the 4th quarter GDP data.
There will be a big dose of housing data with Existing Home Sales and New Home Sales as well as the home price index which will give a good idea of the market direction of the real estate market, but these releases are unlikely to materially impact rates.
The “Talking Fed”
There are several Federal Reserve members speaking this week:
03/23 President – Bank of Cleveland Loretta Mester, President – Bank of San Francisco John Williams
03/24 President – Bank of St. Louis, James Bullard
03/25 President – Bank of Chicago, Charles Evans
03/26 President – Bank of St. Louis, James Bullard, President – Bank of Atlanta Dennis Lockhart
03/27 Board of Governors, Stanley Fischer
The bond market will be looking for an overall theme.
Treasury auctions this week:
03/24 2 year note
03/25 5 year note
03/26 7 year note
Across the Pond
Greece is the Word: As this drags on, traders are becoming more and more concerned that the math simply doesn’t add up. Greece desperately needs to tap into the final amount of money apportioned by the bail-out to survive past April. However, Greece simply hasn’t put into action any of the austerity programs that they pledged to make in order to get their extension last time around. And the ECB/IMF/Germany will not allow Greece to tap into that available credit line until they do. This has our U.S. bonds seeing great demand and is the primary driving force in your MBS pricing right now.
Oil: Continues to drop and feel the pricing pressure from over supply as Saudi output rises near record levels as they will not curb production simply to calm market prices. This is also providing a lot of support for our bonds.