Unbelievable!! That is how to describe 2009. You can add the positive or negative inference as you feel it deserves, but the word seems to be spot on for the year. As we move in to 2010, we are seeing the economy begin to move in a positive direction, ever so slowly, and we are seeing the Government begin to slowly withdraw itself from the Mortgage Backed Securities (MBS) Market. Earlier this week the Treasury department stated that they will no longer be a buyer of the Mortgage Backed Securities as of the new year, but the Federal Reserve will continue to spend it's 1.25 Trillion available in that market. They did promise however to give an unlimited line of credit to Fannie Mae and Freddie Mac to make sure that they would never "fail". (Did your eyes just pop out too?)
The bond markets are not viewing any of this news well as to the long term security of the MBS and with the current pass on those in default along with the increased pressure for modifications, many international investors realize that the security of their investment in this market is not that secure. Hence the markets are seeing withdrawals from outside investment in the markets, raising interest rates.
The average rate last week increased by .25% and is steadily holding until the New Year. Once we see the growth indicators early in 2010, we will more than likely see a continued rise in rates. The fundamental things needed to decrease interest rates will be continued tightening of guidelines creating less risk for foreign investment, continued support from the Government and the Federal Reserve to fund the MBS Market, and a default/modification policy that will make investors feel confident that they will not lose their money in this market. All of these truly hinge on the ability of our economy to create jobs allowing for the market to balance with more home purchases.
Here is a synopsis of today's market news:
Treasuries and mortgages opened a little weaker again this morning but generally unchanged; the stock indexes early were better as year end buying continues. No early data to think about but at 9:00 the Case/Shiller Home Price index, expected to show prices fell 7.10% in the month of Oct frm Oct 2008, it hit at -7.3%. Prices compared to Sept were unchanged. The initial market reaction was slightly positive but not much.
At 9:30 the DJIA opened +25, the 10 yr note at 9:30 +4/32 and mortgages +3/32 (.09 bp).
At 10:00 Dec consumer confidence, expected to have increased to 53.0 frm 49.5 in Nov, was at 52.9 frm a revised Nov reading of 50.6. the one yr expectations index jumped to 75.6 frm 70.3 in Nov. Not much initial reaction to the report.
Still in holiday mode with not many on the job; nevertheless Treasury is at the well again today auctioning $42B of 5 yr notes at 1:00 this afternoon. Yesterday's $44B 2 yr note was OK but that is about all we can say for it even after the recent spike in rates. Today's 5 yr is more critical to the mortgage markets and tomorrow's 7 yr auction is even more important as a measurement of investor and foreign demand. Rates have exploded after hanging at historic low levels; the 10 yr note in the last month is up 65 basis points, mortgages up 60 basis points.
Rates are likely to continue to move higher as the economic outlook is increasingly more positive, and with the US budget deficit increasing with no early end to it, it will take higher rates to feed the kitty and fund the massively exploding debt the US is accumulating. U.S. gross domestic product will increase 2.6% next year after contracting 2.5% in 2009, according to the median economist forecast in a Bloomberg survey. Finally markets are beginning to add up the debt, and with the health care bill about to be passed (in some form), no matter what direction it takes it WILL increase the US budget deficit. Do not be deceived by what the Obama Administration is touting, that the health care bill will actually help reduce the deficit; the bill will over the next 10 yrs add billions to the federal deficits according the CBO.
Until 1:00 this afternoon when Treasury auctions $42B of 5 yr notes the bond and mortgage markets will trade quietly, but a little better. Yesterday's 2 yr was marginally OK. The market's ability to swallow the supply in the face of holiday-staffed desks and year-end will no doubt be tested, but the offerings may surprisingly impress considering the bar has been set fairly low and yields are running at the highest levels since August. Higher rates may keep demand from tailing off, at least that is what some traders are thinking. If the 5 sees strong demand expect a little improvement in the mortgage market but not much with the even more critical 7 yr tomorrow.
End of year holiday trading is always suspect, no matter the direction rate move; have to wait until next week when everyone is back working to get a true test of the bond market. The bond and mortgage markets remain technically oversold and are in many respects way overdue for a bounce. We will get the bounce however, any retracement isn't likely to be much as the outlook for interest rates is up. Investors are convinced the economy is on the path of further improvement; while we do not believe inflation will be a problem in 2010, with rates at these low levels investors and traders will continue to worry about the possibility. Expect the 10 yr note, driver for mortgages, to climb to 4.00% in Q1 and mortgage rates for 30 yr fixed up another 20 basis points in that timeframe.
Not much in the way of economic readings this week; tomorrow the Dec Chicago purchasing mgrs index, expected at 55.1 frm 56.1. Thursday weekly jobless claims, expected to increase by 8K to 460K with continuing claims expected a little higher at 5.1 mil frm 5.076 mil. That's it! The bond and mortgage markets will close at 2:00 on Thursday and closed Friday.
Please call with any questions or scenarios.
Chris Bassett
Mortgage Consultant
212 N. First Ave. #103
Sandpoint, ID 83864
Office: (208) 265-8981
Cell: (208) 290-0305
Fax: (208 265-8740
Apply Online: www.cjbassett.com
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