Weekly Mortgage Overview: 12/21/2015

By December 22, 2015Mortgage Overview

What Happened Last Week?

Mortgage backed securities (MBS) lost 29 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher from the prior week.

All the oxygen last week was consumed by the Federal Reserve and their first interest rate hike since June 2006.

What can be confusing for consumers is the term “rate” is so generic, it can mean many different things. First of all, the Fed cannot change interest rates for consumers directly. What they did is increase their Federal Reserve Fund Rate to 0.50%. This is the rate at which depository institutions (such as banks and credit unions) lend their excess, reserve balances to other banks overnight through the Federal Reserve system.

The result is that now all the major banks have raised their Prime Lending Rate from 3.25% to 3.50%. Now, that prime rate is often used as an index to base other rates on and as a result, car rates, credit rates, etc., will begin to tick upward. But fixed mortgage rates are not based upon Prime nor the Fed Funds Rate that just increased.

Conventional (Fannie Mae and Freddie Mac) mortgage rates are determined by the open market place based upon their bonds that are sold in the secondary market place. Of course, demand can be heavily influenced by anticipation of future interest rate hikes by the Fed but it is not a one-to-one factor. Actually, mortgage rates DECREASED slightly after the Fed raised their Fed Fund rate but that is likely only a temporary phenomenon.

As widely expected, the Fed gave us the rate hike BUT they tempered it by projecting rates would stay below 1.5% through the end of 2016.

It’s clear that we can expect Fed Funds to be well above the important 2.0% by 2017 and north of 3.0% by 2018…that is in just over two years! As a result, long-bond traders will gradually hedge towards increasing rates.

What the Fed said: In their policy statement they were sure to set a very dovish tone: “The [Fed] expects economic conditions will evolve in a manner that will warrant only gradual increases in the fed funds rate….”

What the Fed projects: New projections show officials expect their benchmark rate to creep up to 1.375% by the end of 2016, according to the median projection of 17 officials, to 2.375% by the end of 2017 and 3.25% in three years. That implies four quarter-percentage-point interest rate increases next year, four the next and three or four the following.

What’s on the Agenda for this Week?

There really isn’t anything that is likely to hurt pricing this week, particularly with a long holiday weekend and the typical “parking” of money in bonds which temporarily drives up demand. It will take a much weaker than expected revised 3rd quarter GDP, a dismal Durable Goods Orders and a very weak PCE reading for MBS to really rally. Remember, there is a big difference between a price improvement and a rally. The price improvement is a very real probability this week but a rally is not.

We have a holiday shortened week that will see very low volumes after Wednesday at 12:00EST. The bond market actually closes early on Thursday (Christmas Eve) at 2:00EST and won’t reopen until Monday morning. But most of the trading will be done after Wednesday’s economic releases hit.

The week starts with a pause as there is nothing interesting for bond traders on Monday but there will be some potentially impactful economic releases this week.

Three Things

The three items that have the greatest potential to impact intra-day pricing sheets are (1) GDP, (2) PCE and (3) Durable Goods Orders.

(1) GDP: This is actually the third time that this data will be released. It has been revised upward each time but the market is expecting that this time it will be revised downward from 2.1% to 2.0%. Any reading of 2.30 or higher will cause a sell-off in MBS; any reading below 1.9% will cause a rally.

(2) PCE: This release also includes Personal Income and Spending that will be closely watched. But the key here is the YOY (year over year) reading for the Core PCE as this is a main gauge of inflation for the Fed. The closer this reading moves from its current level (1.3%) to the Fed’s target rate of 2.0%, the more volatility there will be in pricing.

(3) Durable Goods Orders: Certainly surprised by the upside last time around. This report has been very volatile recently. The focus will be on the Ex-transport reading which is expected to be flat at 0.0%. The reading will need to be well below zero for MBS to rally.

Housing: There will be a nice dose of Housing news this week (Existing and New Home Sales) but it will not be a factor in pricing. Still, it’s good to know how the biggest part of the mortgage market is doing as purchases are the driving force in our industry and will be for the next several years.

There are no major Treasury auctions or Talking Feds this week.

Market Wrap-up

There were no major economic releases today to guide pricing, so it was trapped in the same range as Thursday and Friday.

As expected, MBS have trended right along the 25 day moving average with no real movement pricing today.

After two straight days of nothing (Friday and today), we finally get something to sink our teeth into tomorrow with the 3rd release of the 3rd quarter GDP and Existing Home Sales.