Weekly Recap and Today's Forecast

On Monday Mortgage backed securities MBS lost -21 basis points from Friday's close.  The benchmark FNMA 3.5 November MBS traded in a narrow range today -27BPS with your best pricing at open and worst pricing at 4:45EDT.

At 10:00EDT we received the Existing Home Sales report from the National Association of Realtors.  Sales of previously owned properties fell -1.9% in September.  However, the market was expecting a bigger drop off of -2.5%

While this number was worse than market expectations, that is only due to the fact that the August reading was revised downward from 5.48 million units to 5.39 million units.  MBS were trading at -8BPS before the release and -8BPS after the release.

Overall, MBS were under pressure due to trader speculation that Tuesday's delayed Non-Farm Payroll Report may beat the consensus estimates of 180K.  But your downside is somewhat limited even if the report is a block buster because it will not contain all of the furloughed workers from the shut down that will hit on the next report.

Tuesday saw the MBS market end the day with an improvement of 72 basis points, which should see rates improve anywhere from .125% to .250% from Monday's rates.  The huge rally in MBS (Mortgage Backed Securities) was caused by the very poor showing of the Non-Farm Payrolls, which led traders to believe that tapering is even further down the road than thought due to the government shutdown causing the economic recovery to be somewhat derailed.  This huge movement early in the day really highlights why it is so important to work closely with your Mortgage Loan Professional to monitor the market in real time with live data.  Even though we didn't expect to see this move yesterday, as it looked like the technical indicators were pointing to a bit of interest rate increases, the ability to monitor live market reactions saved many consumers hundreds or thousands of dollars.  You can only gain access to this real time information by working with your Most Trusted Mortgage Loan Professional who shares this daily report with you. 

The Unemployment Rate dropped from 7.3% to 7.2%, which is the lowest since 2008.  And if the employment picture was actually improving then MBS would have sold off yesterday, but MBS did not sell off, it in fact rallied.  This is due to the Unemployment Rate not being considered reliable by traders.  What they focus on instead is real data.  That real data is the September Non-Farm Payroll report.  The market was expecting a reading of 180K, and it came in much lower than that at 148K.  ANY weaker than expected news about the labor market is positive for bonds as it puts the timeline for the Fed taper further and further down the road.  August was revised upward and July was revised downward for a net effect of 9K more jobs over those two months.

The 10 year U.S. Treasury note moved in similar fashion going from a yield of 2.5863 down to a yield of 2.5309.  We also got Construction Spending and it was stronger than expected but the market ignored the results due to the fact that this reading will obviously be much lower next time due to the government shutdown.

Wednesday was a very important test for the U.S. 10 year Treasury bond.  If the 10 year broke below the 2.50 yield level, then you would see some better pricing on your end as MBS may try to test our 200 day moving average.  We did make a run at it but failed to test our 200 day moving average for our benchmark FNMA 3.50 November coupon as we missed it by 31BPS.

The 10 year Treasury note did trade below the 2.50 yield level...dropping all the way down to 2.4713.  At that point MBS rallied to their best levels of the day which was +31BPS higher than yesterday's close.

But Treasuries rebounded...getting back to 2.5011 and MBS sold off of their highs of +31BPS at 2:05EDT and sold off -25BPS from those highs down to +6BPS by 5:00EST.

Import Prices fell on a year-over-year basis which is a slight positive for our economy as so much of our raw materials or sub-assembly components come from overseas.  With lower import costs, it is anti inflationary which a positive for bonds is usually.

Mortgage Applications dropped -0.6% for the week.  MBS do not react to this data as demand for MBS is already known well before this report is released.

Across the Pond: U.S. based bonds are seeing more demand due to concern from overseas on a couple of fronts.  First up is the banking sector in Europe as the European Central Bank is set to start another round of bank stress tests...and this after some weak bank earnings. China's banking system is also under pressure as their major banks announced huge write offs on bad debts causing traders to be concerned about the projected growth rate in China.




Today we've settled right in the middle of our new trading range, and there isn't a lot of pending economic data today that should really move us.  It's probable that we see a pretty tame trading day today, with very little volatility that would cause any concern for lender reprices for the worse.  It's also not likely that we see any real rate improvements today either.  Be sure to communicate with your Mortgage Loan Professional to stay abreast of any unforeseen movements that might cause concern though.  Remember that the mortgage professional that sent you this report today is also monitoring the MBS (Mortgage Backed Securities) market in real time and is your best resource to stay ahead of lender's pricing reactions to the market.

Today’s Initial Weekly Jobless Claims came in at 350K which was higher than the est. of 340K.  The prior week was revised upward from 358K to 369K.  This is a slight positive for bonds





The updated Real Estate Report can be viewed at: http://www.newsletterproonline.com/newsletter/originationpro/?newsletter=true&nid=497&uid=10671

- Michael Corboy

www.specialtyfinancialmtg.com