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Monday, March 10, 2008

When will rates get better? S&P 500 is starting to fall.


Looking back to Friday, we had a nice improvement in both Treasury rates and mortgage prices after the payroll numbers indicated that labor is indeed slowing. The market believes that the Fed will lower overnight interest rates by 75 bps at the FOMC meeting next Tuesday, and some think that Fed Funds may eventually hit 2.0%. Friday's job report had very little "good" news for the economy, as NonFarm payrolls dropped for the second consecutive month, with back-month revisions downward, and most industries showed job losses.

This week we'll see the US trade deficit report tomorrow (expected -$59 billion), Thursday's weekly jobless claims (expected +4k to 355k), February Retail Sales (expected +0.8%), and then on Friday the Consumer Price Index for February (expected +0.3%) and the University of Michigan's Consumer Confidence report (expected -0.4). Currently the 10-yr is at 3.53% and mortgages are roughly unchanged from Friday.


So here's the $100 million question.... When the heck are mortgage prices going to improve? Why is the 10-yr Treasury down into the 3.5% range, yet conforming/conventional 30-yr loans, eligible for FNMA & FHLMC, back up into the 6% range? The widening that is occurring out to these levels, which statistically speaking happens once every 4,000 years, is a combination of several factors.

First, investors and money managers feel safer putting their money into Treasury securities rather than mortgage-related securities (right now, that seems like a "no brainer") Subjecting their money to the potential of borrowers defaulting and property depreciation is something that many prefer not to do. These two factors have led to losses for FNMA & FHLMC, along with others, and some investors have been selling mortgage securities in order to meet capital requirements. And selling has led to lower prices, and thus higher rates. That's it in a nut shell.

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