Weekly MBS Update

Driving recent interest rate hikes was a massive selloff in mortgage backed securities.  MBS traders see the additional Fed purchases as an impediment to their progress.  Remember that bonds typically sell on good news.  Nominally the goal is to make money more available to consumers.  The real goal of QE 2 is to lower the value of the dollar so that foreign buyers will buy our more attractively priced products, get the economy moving and create jobs.  Those results should benefit stocks.  All of this additional expenditure, however, would eliminate any concern about deflation and would in fact cause inflation.  Inflation, as you know, is the arch enemy of bonds.  Also the Chinese raised their interest rates twice in the past weeks making their bonds more attractive because of the higher yields.  The one saving factor for MBS bonds is that in times of global crisis they still are considered a safe haven and funds flow into them causing them to rise.  Friday, for instance, despite the QE2 purchases, instability in Europe caused bonds to improve somewhat.  It is amazing how little people in the industry and in the media know about all this.  I heard a mortgage company owner on CBS radio Wednesday saying that QE2 would lower interest rates possibly down to the mid three and saying that they were currently at 4.125%.  The 30 average year rate in Connecticut on Friday was 4.50%.