The Debt Ceiling

Yesterday Mortgage backed securities (MBS) lost -20 basis points from Friday's close (Monday was closed due to Columbus day) which caused 30 year fixed rates to move upward slightly.

The Fannie Mae benchmark November 3.5 coupon has been under pressure all day and traded in a very narrow range of only 25BPS.

MBS probably would have sold off more, but we saw some good support from our 25 day moving average.

We had only one low level economic report(Empire Manufacturing Index) which had no impact on pricing.

Bond trading is solely focused on the debt ceiling talks.  We have gone from optimism to pessimism and back again several times yesterday.  Our worst levels of the day (so far) were just after 2:00EDT when the Senate said that all talks on their side are on hold until the House gets them another new proposal. It is clear that the spirit of cooperation that we started the day with had dissipated.

Remember, the issue for bonds is not so much the government shut down, but instead it’s the debt ceiling that we will hit on Thursday and the bond market has been hijacked, since it is unable to operate until our government has a solution for our debt ceiling.  Once we get a solution, the bond markets will react strongly.  However it depends on what form that solution comes in.  A temporary extension will get one reaction while a full year extension will get quite another.

We were supposed to get the closely watched CPI this morning but alas...another victim of the

Shut-down, but we will get the Home Builders' Index at 10EDT. This generally is not a report that materially moves pricing but it will be interesting to see how that is trending.

The Fed's Beige Book will be released this afternoon and will give us an insight into the data that the Fed is looking at. Even if this shows growth in the labor markets and economy, the market will discount it knowing that the shutdown has provided some strong headwinds that will not show up in their reports fully yet.

Fitch Ratings placed the U.S.’s AAA credit rating on a negative watch yesterday, citing the government’s failure to raise its borrowing limit as the deadline approaches. There are $120 billion of U.S. Treasury bonds that are due for payment tomorrow....the same day that the Treasury Secretary has warned that we will reach our debt ceiling.

Pre-Market Status: Neutral/Locking. It’s all about the news and speculation about an agreement on the debt ceiling. If a deal is made...it depends if it is a short term extension or if it is a one year extension...just what exactly had to be given up to get that deal. Depending on the specifics of the deal....bonds could react strongly. MBS are likely to once again test our floor of support located at our 25 day moving average. If we break below it, it would be a negative sign for your pricing.

Pricing is been improving throughout the day, but this gain could be short lived.  Contact a qualified Mortgage Professional to keep you fully up to date with live reports and market data.

- Michael Corboy

www.specialtyfinancialmtg.com