Yesterday, mortgages opened another 6 to 8/32 tighter (stronger) to swaps off of overseas and Fed buying. Spreads widened after heavy origination coupled with profit taking at higher dollar prices. The Fed offset that by adding billions to its portfolio throughout the day, and dollar rolls fared better, particularly the FN 5%, which spiked 2.25/32 higher. Mortgages closed on spread to 4/32 wider to swaps. While overall activity felt lighter than the last couple of months, we saw continued price improvement in High Balance Loan (HBL) securities. HBL FN 4.5s, 5s, and 5.5s traded -47,-43 and -40 behind TBA. Last week, pricing of similar coupons was -64, -44, and -44, respectively.
Much attention was focused yesterday on Treasury Secretary Timothy Geithner's "financial stability plan" that he finally unveiled. Details of the plan were leaked prior, so the markets were looking for clarity, which Geithner did not provide. The equity markets did not react favorably as the major stock indices fell more than 4% while Treasuries rallied. The $32 bln 3-year T-note auction was met with good demand, drawing in a yield of 1.419% compared to the forecasted 1.476%. This morning, Treasury prices are slightly lower ahead of today's auction. The Treasury's February refunding continues today with a record $21 bln in 10-year T-notes for auction at 1 p.m. ET.
The MBA mortgage application index for the week ending Feb. 6th declined -24.5% after gaining +8.6% the week prior. Refinancing activity fell -30.3%, and the purchase index dropped -9.8% to its lowest level since December 2000. With tightening credit and rising mortgage rates, a slowdown appears to be the trend. Lenders continue to report lackluster lock volumes as we head into a holiday weekend. The 30yr fixed rate with zero origination point is still ranging from 5.25%-5.5%.
The economic calendar remains light this week. At 8:30 a.m. ET, the US Dec trade deficit report is expected to narrow from -$40.4 bln to -$36.0 bln, due to declining oil prices. The markets will also be watching testimony from executives of the major US banks on how they used the first $350 bln of funding from the Troubled Asset Relief Program (TARP).