Mortgage Market Commentary

Mortgage backed securities (MBS) prices have held nearly all of the gains from yesterday afternoon's dramatic rally following the Fed's announcement; FNMA 4.5% coupon 102.44bps, -6bps. MBS and Treasury yields plunged yesterday as the Fed surprised investors with additional plans to lower consumer borrowering costs and lift the economy from recession. 10yr note yields tumbled 47bps yesterday, most since 1962, while yields on FNMA 4.5% coupon fell 27bps, widening the spread from 210bps to 230bps, up from an average of 175bps the past decade. The central bank is trying to lower rates by reducing the supply of outstanding mortgage bonds, boosting the prices and thus lowering the yields. Lower mortgage rates by themselves may not be enough to spark demand for home purchases. Slumping stock prices, record foreclosures, falling home prices and job losses are reducing demand for new & existing homes. Consumers are also having difficulty obtaining mortgages as banks tighten lending standards. Jobless claims fell 12k to 646k and the number collecting benefits swelled to a record 5.47 million. The index of leading economic indicators fell in February reflecting worsening conditions and the Philadelphia Fed index at minus 35 showed manufacturing shrank as orders and employment weakened.