Learn from the Past
Mortgage backed securities (MBS) gained 333 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move downward to their lowest levels in history.
Overview: Fed to the rescue! Mortgage rates dropped to their lowest levels on record as the Federal Reserve directly purchased massive amounts of mortgage backed securities, creating demand where there was essentially none. Each trading session they purchased $50 billion dollars’ worth.
Inflation Nation: The February Headline PCE YOY matched market expectations (1.8% vs. estimates of 1.8%). Core (ex food and energy) YOY increased 1.8% vs. estimates of 1.7%. Personal Income MOM 0.6% vs. estimates of 0.4% and Personal Spending 0.2% vs. estimates of 0.2%.
Consumer Sentiment: The preliminary March reading was revised lower from 95.9 down to 89.1.
Stimulus: The House finally passed the $2T bill that passed the Senate by a vote of 96-0.
The Talking Fed: The Federal Reserve Bank of New York purchased $50B of MBS each day
Central Bank Palooza
The Bank of Canada cut their key interest rate by 1/2 point and will purchase 500B each week which includes corporate debt. The Bank of England kept its key interest rate at 0.1%. They had previously cut that from 0.75% at an emergency meeting. They took no action at this regularly scheduled meeting. The European Central Bank started purchasing bonds under its new emergency QE facility and so far it is helping both Spanish and Italian bond yields.
What’s on the Agenda for this Week?
Buckle up for another exciting week as MBS shoot into new and higher levels that have never been seen before, but does that necessarily mean better pricing for MBS?
The three areas that have the greatest ability to impact backend pricing this week are: (1) Coronavirus, (2) Central Bank Palooza, and (3) Domestic Flavor.
(1) Coronavirus: This continues to be the most important story since WWII for the economy – even more important than the financial implosion of 2008-2010. While infections continue to spread, economies are shut down and financial markets are broken. Even when some countries like China claim to be coming back on line, there is no one for them to produce and sell to. Here are some of this morning’s headlines that are getting the attention of bond traders.
• President Trump has extended the social distancing guidelines until at least April 30th
• New York surpasses 1,000 deaths
• Spain joins Italy and the United States as countries with more reported cases than China
• South Korea reports a resurgence in cases
• Dr. Anthony Fauci appeared on CNN’s “State of the Union” yesterday and declared that the current modeling projects between 100k and 200k deaths in the US alone
(2) Central Bank Palooza: Over the past three weeks emergency measures have been taken by several of the G20s and some more than once. This week starts off with emergency action out of the People’s Bank of China as they unexpectedly cut the rate on reverse repurchase agreements by 20 basis points, the largest in nearly five years. Our Federal Reserve is looking into adjusting the amount of daily MBS purchases as well as other measures.
(3) Domestic Flavor: This is actually a very big week for economic data. Jobs will get the most focus with ADP Private Payrolls, Initial Weekly Jobless Claims, Challenger Job Cuts, Non Farm Payrolls, Average Hourly Earnings, Unemployment Rate and more. The NFP is expected to go negative for the first time since 2010. Also, there will be important manufacturing news with Chicago PMI and ISM PMI, both expected to show a manufacturing recession. But of more importance is the ISM Services number (2/3 of our economy) which is expected to go negative for the first time since 2010.
Taking it to the House: February Pending Home Sales were stronger than expected with a YOY increase of 9.4% vs. estimates of 1.7% and a MOM gain of 2.4% vs. estimates of -1.0%.
Implode-o-Meter: It’s baaaaccckkkk! Mortgage companies are behaving like millennials in mommy and daddy’s basement, they are screaming that it’s just “not fair” that they bet the wrong way and due to the Fed purchasing MBS and driving up the prices, that they are suffering huge losses on margin calls. Therefore, they demand that (1) The Fed stop buying MBS (it looks like the Fed did actually reduce purchases today) and (2) that the tax payers bail them out. Nice. Forget the fact that the Fed widely telegraphed this action a month ago. So far, AG Mortgage Investment Trust, TPG RE Finance, Invesco, ED&F Capital and MFA Financial have all said that they can’t meet their margin calls and need financial help of some measure.
But there are legitimate concerns for mortgage companies as the first of the month is quickly approaching and there will be many missed or delayed payments due to massive job losses (4 million in the last week).
Coronavirus: The Fed projects Unemployment Rate could hit 25% in next couple of months.
On Deck for tomorrow: Chicago PMI, Case Shiller Home Price Index.