What Happened Last Week?
Mortgage backed securities (MBS) gained 22 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways.
It was another week of volatility with a big swing in pricing. The spread between intra-day high and intra-day low for the week was -95 basis points.
International events were once again the primary factor in trades for the week, as there were multiple parliamentary votes that were passed in Greece, Germany and Austria just to name a few. And all of these votes were for approval of the third round of bailouts for Greece. Greece also got a bridge loan and access restored to the ECB’s emergency liquidity fund.
Even though international events drove our markets, there was still a lot of domestic data.
The “Talking Fed”: Fed Chair Janet Yellen gave her semi-annual monetary testimony before the House Financial Services Committee and the Senate Banking Committee. In her prepared remarks and in her responses to the questions asked of her, she stayed right on point and simply reaffirmed the Fed’s economic outlook and policy statement that the minutes from the last FOMC meeting showed. She reminded the markets that the Fed expects to start raising rates this year. While she is still concerned about labor slack (which has been improving), the risks to our fragile economy with a small rate hike are far smaller than the risks to the overall economy by waiting too long before raising rates.
Domestically, there was a huge plate of economic data to digest. On the Housing front, both the Home Builder’s Index and Housing Starts/Permits were very strong. Both PPI and CPI showed very small increases in month-over-month inflation; Empire Manufacturing and the Philly Fed survey both were much weaker than expected; and Consumer Sentiment pulled back but was still at good levels.
What’s on the Agenda for this Week?
There were very small incremental gains on Wednesday, Thursday and Friday last week, but that trend won’t work for today as MBS will pull back and we will see some very small losses and the combination of Greece making its ECB payment and Bullard’s comments.
Tomorrow we have…bubkis. NO economic data is available until Wednesday. Domestically, we have a very light economic calendar with no major releases that have the gravitas to move the needle of pricing. We also do not have any major Treasury auctions.
So without any major economic news domestically, where will MBS get their momentum? You’re absolutely right – from overseas.
Greece is the Word: While the long bond market is still very skeptical that Greece will ultimately get a deal through with Germany’s blessing, Greece is making all the right moves and is making incremental steps towards getting a deal done. Today, Greece has reopened their banks (to long lines) and has made a very important payment to the IMF and ECB. This money of course came from their bridge loan…so it’s really like the creditors are paying themselves. But the IMF is still sounding the alarm that no new deal should happen without a significant “hair cut” to Greece’s debt that would be in the 20 to 30 percent range.
Talking Fed: St. Louis Federal Reserve Bank President James Bullard said that (in his opinion…not an official policy statement):
– The economy doesn’t need emergency policy anymore (and 0 to 0.25% IS emergency policy)
– Greece and the Chinese stock market moves won’t hurt the U.S.
– It is prudent to raise rates and then go meeting-by-meeting.
The stock market (NASDAQ 5230.98) has hit a new all-time intra-day high…yet MBS are doing nothing.
It was a nice and boring trading session today (for a change) as MBS are trapped in a narrow range due to opposing forces – squeezing MBS sideways.
Downward (worse MBS pricing/higher rates for consumer):
See the notes above on Greece.
Upward: (better MBS pricing/lower mortgage rates):
Oil: Continues to drop due to the new supply of Iranian oil which has been hidden and stored in tankers and future supplies that will flow after U.S sanctions are lifted. These lower oil prices reduce the likelihood of near term inflation.
Greece is the Word: Yes…that’s right it is both good and bad for pricing as plenty of traders still think that this will “go south” and as a result is providing some “safety” momentum in MBS.