Over the years, MMG has continued to help the mortgage community discover and understand the disconnect between the 10-year Note and Mortgage Bonds. In recent times that disconnect has been very clear to anyone in our world - but in the past 24 hours, the disconnect has been dramatic. Since yesterday the 10-year Note has risen by 285bp, while Mortgage Bonds have risen 12bp!!! Do you think the media knows this? NO. Use this to inform your relationship partners and clients of what really drives fixed rate mortgages.
So what happened? Yesterday the Fed Minutes from the October Fed Meeting were released. The Minutes expressed concern over the health of the economy and their future targets for employment and growth were lowered. But the big news was the "D" word. The Fed, after years of being concerned with inflation, now say they are concerned about deflation. This news shocked the financial markets, pushing Stocks sharply lower while directing enormous money flow into ultra-safe Treasury Notes.
Deflation is when prices drop, mainly due to decreases in money supply and credit. And we are sure seeing problems with available credit right now. And with the economy slowing down, we are hearing some people say we are in for a deflationary recession. In a deflationary environment, investors flee into fixed instruments like Bonds because the fixed payment received would actually buy them more goods and services over time.
For those of you in the business a few years, you may recall back in the Spring of 2003, when Alan Greenspan uttered the "D" word. Mortgage Bonds rallied 400bp in a couple weeks, setting off an unprecedented refi-boom. Things are quite different right now, but stay tuned, should more investors wake up to the value of Mortgage Bonds, we could again see a significant improvement in prices. Get your clients informed and ready - all refi-runs have a limited timeframe. And this time will certainly be more challenging as there are fewer programs with stricter guidelines, but the biggest hurdle will be appraised values. Now would be an excellent time to run some filters on your database and see who would best be able to benefit from the window of opportunity when it hits.
Initial Jobless Claims continue to worsen as 542,000 filed this past week, far more than the 503,000 that was expected and the highest in 16 years. The four-week average of initial claims climbed by 15,750 to 506,500, the highest since January 1983. While the numbers are ugly, comparing them to previous markers is a bit unfair because there are more people today.
At 10am ET, the Philly Fed Index will be reported and while this may influence pricing in a typical market, we don't expect it to reverse the course of Mortgage Bonds.
Prices have barely peaked above the 200-day Moving Average. We will continue to float, but be mindful that things can change quickly. And a reminder about 2003, when Alan Greenspan came back and later said there is no threat of deflation - the refi-boom quickly ended and rates shot up dramatically higher. Stay tuned - we are living history.
Thanks,
Greg Adelman
Midwest Home Center LLC.
715-483-0012
612-735-4414 cell
612-395-5444 fax
www.midwesthomecenter.com
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