Mortgage Market

Mortgage Market Commentary from rate watch...


Mortgage backed securities (MBS) prices are
higher (rates lower) and recovering a little
lost ground ahead of the weekend; FNMA 4.5%
coupon 100.05bps, +30bps and the high of the
session. U.S. Gross Domestic Product (GDP)
shrank 5.7% in the 1st quarter, larger than
forecast, following a 6.3% tumble in the last
three months of 2008, capping its worst 6 month
performence in 50 years. The revised figures
reflect declines in housing, inventories and
business investment as companies continue
cutting jobs as profits remain under pressure,
causing consumers to limit spending and slowing
any expansion. Companies cut total spending,
including equipment, software and construction
projects at a record 37% annual pace.
Residential Contruction fell at a 39% pace last
quarter, the most since 1980. On the inflation
front, headline Personal Consumption
Expenditures (PCE) index declined 1.0%, while
core PCE, the Fed's favorite measure of
inflation, showed an annual 1.5% increase. Lower
inflation is good for MBS. Chicago Purchasing
Managers Index (PMI) fell to 34.9 from 40.1,
with business activity contracting at a faster
pace than forecast as orders and employment
dropped. Chicago PMI is an early reading on the
outlook for overall U.S. manufacturing. Consumer
Sentiment moved incrementaly higher to 68.7 from
67.9 with improvement in both the assessment of
current conditions and the outlook of future
conditions, with inflation expectations
remaining very limited. Mortgage rates have
surged (duh) threatening prospects for a quick
rebound in the housing market. While yields on
MBS are moving higher, those on corporate bonds
have fallen 140bps since March, with the
narrowing gap seen as a sign that credit markets
are gradually improving.