Great commentary I saw today regarding interest rates and why they are where they are.
Thanks to Mortgage News Daily
Fed done. Nothing new, no unexpected events. The advancement of President Obama's Stimulus Plan and the possibility that a "Bad Bank" will be created to buy up toxic mortgage assets is encouraging for equity markets, but the feelings wont Be mutual for the TSY market. Increased issuances of gov. debt will drive up longer maturity yields and the TSY curve will steepen in the sell off. The Fed's continued involvement in the MBS market will provide stability and assist in the tightening of MBS/TSY spreads as Gov.notes and bond yields rise. Just remember that ALL markets are a day trader's delight right now and buying the dips and selling the rips is a popular trading strategy. In the mortgage origination world I would equate this to doing a ton of units with tight profit margins...in the long run you work harder but make a decent living.
I am feeling more encouraged about the prospects for tighter primary/secondary spreads. If you are a new reader I am referring to the difference between what rate borrowers are offered compared to how the MBS stack is behaving. On Tuesday and Wednesday we observed increased lock desk activity which led us to believe that an originator hedge was on the horizon (they lock their loans just like you do). Part of the reason for yesterday's early afternoon reprice alerts was this mortgage banker pipeline protection activity. Anyway what excites us this morning is the fact that the enlarged originator offering was concentrated in lower coupons like 4.0s and 4.5s. So while this could be attributed to less lock activity over the past 10 days...it could also mean that mortgage banks are starting to submit to the secondary markets requests for lower coupon production. Either way it is a positive for us and barring any TAPE BOMBS the road to reduced rates is slowly being paved. To respond to one readers comments....the light at the end of the tunnel doesn't seem to be a train heading our way! In regards to timing all we can do is keep our ears to the ground and listen to the whispers from lending ops centers.
Going back to the day trading environment. Yesterday the Fed re-iterated that "credit conditions for households and firms remain extremely tight" and we know that Bernanke's goal is to "facilitate the extension of credit to households and small businesses" ....the Fed will do this "facilitating" by keeping interest rates low. They will do so by purchasing moderating the Fed Funds rate, purchasing TSY debt, and providing a stable down in coupon bid in the MBS market. Anytime the MBS stack looks relatively weak it is an opportunity to buy on the "cheapness". Once those positions become relatively expensive...profit taking will occur and the Fed will step in to support us...and a cycle ensues.
The extent to which our rates get worse or better is a function of two factors. The first is how much the Fed buys (hopefully still in 4.0s and 4.5s) and the second is prepayment expectations. The latter is dependent on our lenders ability to pass along gains and borrower's feeling like they are finally getting the rates for which they have been patiently waiting. This price function has two dependant unknowns so making an assumption of when to expect lower mortgage rates will involve a great deal of variables. We do however appreciate the regular updates from our readers on the progression of the operational "beefing up" process.
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