Learn from the Past
Mortgage backed securities (MBS) gained 11 basis points (BPS) from last Friday’s close which caused fixed mortgage rates move sideways on a weekly basis, However, it was a roller coaster of a week with mortgage rates shooting up Tuesday, Wednesday and Thursday before recovering on Friday.
Fixed mortgage rates shot up for most of the week as major financial institutions and traders liquidated anything that they could which included MBS (which controls mortgage rates). There was a welcome reprieve on Friday after the Federal Reserve stepped in to purchase MBS and propped up the bond market.
Central Bank Palooza
The People’s Bank of China kept their key interest rate unchanged at 4.05.
European Central Bank: President Christine Lagarde announced another 750B purchase program. “This new Pandemic Emergency Purchase Programme (PEPP) will have an overall envelope of €750 billion. Purchases will be conducted until the end of 2020 and will include all the asset categories eligible under the existing asset purchase programme.”
Bank of England: Governor Andrew Bailey said that the Central Bank stands ready to pump unlimited amounts of money into the economy. The BOE also had an emergency rate cut of -15BPS to drive their key interest rate down to 0.10%.
The Federal Reserve jumped in and saved the mortgage market. They bought another $15B of MBS for both agency and government bonds that were evenly split among the 2.5%, 3.0% and 3.5% coupons and announced another $100B of MBS purchases that will occur throughout the next week.
Taking it to the House:
• February Existing Home Sales hit 5.77M vs. estimates of 5.50M.
• Weekly Mortgage Applications dropped by 8.4%.
• Refinances dropped by 10% and Purchases pulled back by only 1%. • February New Housing Starts were higher than expected (1.599M vs. estimates of 1.500M), plus January was revised upward significantly from 1.567M to 1.624M.
• Building Permits were 1.464M vs. estimates of 1.500M.
• The March NAHB Housing Market Index remained above 70 with a reading of 72.
Learn from the Past
The Fed’s unlimited QE will definitely help pricing but there is a max upside.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Coronavirus, (2) The Talking Fed, and (3) Stimulus.
(1) Coronavirus: This is of course driving the other two items. Here are the most recent headlines that are impacting long bond traders.
• Over 1/3 of all U.S. citizens now on some form of lock down/stay at home order
• National Guard troops sent to NY, CA and WA
• U.S. Cases now at least 35,224 and deaths 471
• Spain sees 26% jump in deaths overnight
• New Zealand shuts down country
(2) The Talking Fed: The Fed has been taking daily action for the past week. This week starts off with a huge move as they essentially announced unlimited QE. You can read their official statement here. They will start with $50 of agency MBS purchases (at least) each and every day this week. They are also purchasing $75B of Treasuries but that has less of an impact on mortgage rates.
(3) Stimulus: The Senate failed to pass anything over the weekend as there are very different opinions on how the stimulus should be applied to private companies and individuals. This started off as about an $850B package a week ago, then was around $1.3T and now could hit $2.0T. The Senate has scheduled another vote for noon on Monday.
Stimulus? Looks like it might be Friday before anything passes as today’s proposed noon vote in the Senate got pushed back as the House now has a new counterprosal.
On Deck for Tomorrow: Richmond Fed Manufacturing, New Home Sales, 2 year Treasury note auction.