Mortgage Rates Pressured Higher as Market Awaits Fed Statement
Posted 11-04-2009 at 08:23 AM by VictorBurek
Consumer borrowing costs increased yesterday as the prices of mortgage backed securities and treasuries were pressured lower. To remind readers, as the price of MBS or treasuries move lower, the yield or rate moves higher…price and yield have an inverse relationship. No major report or headline came out that caused the moved lower, but as the price losses held until close all lenders did reprice for the worse.
This morning the Mortgage Bankers’ Association released the weekly Applications index which tracks the monthly change in the amount of applications for mortgages, refinances and purchase loans, at major lenders. An increasing trend in applications is a positive economic indicator. First, the purchase of a new home shows that the consumer feels comfortable enough with their own job security and finances to make a major purchase. Additionally, it will lead to many other purchases such as flooring, furniture, appliances, etc… to fill the home. Next, an increase in refinance activity should give consumers additional cash each month as they refinance to a lower interest rate and payment. With this increased cash flow, the consumer will have more funds to buy items which should increase future consumer spending and corporate profits. For these reasons, market participants track the applications index for signs of future economic momentum.
The report shows that the refinance activity moved higher by 14.5% last week as mortgage rates fell; however, the purchase activity posted a 1.8% decline. The decline in purchase activity is an indication of weaker home sales in the future.
Next we get a peek into the employment situation with the release of the ADP Employment report. This data is similar to the official government report we get on Friday with a couple key differences. First, the ADP report is compiled by a private company, Automatic Data Processing, and not the government. Next, it only counts private payrolls and does not take into account government jobs. Historically, this report has varied greatly from the official report but it’s accuracy has been improving. Since jobs are so crucial to any economy, market participants track this report to get a gauge on economic momentum but it continues to be of much less significance than Friday’s official Employment Situation report.
Expectations called for a loss of 195,000 jobs, but ADP reports that our economy lost 203,000 jobs last month. The prior months figures were revised from an initially reported loss of 254,000 to -227,000. There was no reaction in the markets following the release.
The final data release today is the ISM Non-Manufacturing Index. This data is a survey of 400 non manufacturing firms across the country regarding the strength of their business conditions. Readings above 50 indicate expansion while reading below 50 indicate contraction. Recent reports have shown that non-manufacturing business conditions have been improving with last month’s report moving above 50 for the first time since the summer of 2008. Economists surveyed had expected to see continued improvement with a 51.6 reading but the actual reading came in lower at 50.6. With the Fed statement in a few hours, there was no reaction to this report.
Helping to keep the pressure on the fixed income sector to move lower is the announcement from the U.S. Department of Treasury regarding the size of the upcoming auctions next week. The announcement shows that they will offer $40billion of 3 year notes, $25billion of 10 year notes and $16billion of 30 year bonds which is basically in line with expectations. The added supply of debt in the market place will continue to pressure yields higher to attract buyers.
The big news of the day will be the Fed statement at 2:15est. Today is the conclusion of the Federal Open Market Committee’s 2 day meeting which occurs 8 times a year. At these meetings, our nation’s monetary policy is set. It is widely expected that they will maintain the current Fed fund rate of 0 to .25%. As always with these meetings, the statement that is released is scoured by market participants for any hint at future monetary policy and their outlook on the economy. I suspect today’s statement will be very similar to the last one. They will maintain the current rate “for an extended period” and caution about a slow and but steady economic improvement.
What are your thoughts on the FOMC statement?
Early reports from fellow mortgage professionals indicate that mortgage rates have moved higher this morning. The par 30 year conventional rate mortgage is in the 4.875% to 5.125% range for well qualified consumers. To secure a par rate you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including one point loan origination/discount/broker fee. You can elect to pay less upfront fees but your interest rate will be higher.
This morning the Mortgage Bankers’ Association released the weekly Applications index which tracks the monthly change in the amount of applications for mortgages, refinances and purchase loans, at major lenders. An increasing trend in applications is a positive economic indicator. First, the purchase of a new home shows that the consumer feels comfortable enough with their own job security and finances to make a major purchase. Additionally, it will lead to many other purchases such as flooring, furniture, appliances, etc… to fill the home. Next, an increase in refinance activity should give consumers additional cash each month as they refinance to a lower interest rate and payment. With this increased cash flow, the consumer will have more funds to buy items which should increase future consumer spending and corporate profits. For these reasons, market participants track the applications index for signs of future economic momentum.
The report shows that the refinance activity moved higher by 14.5% last week as mortgage rates fell; however, the purchase activity posted a 1.8% decline. The decline in purchase activity is an indication of weaker home sales in the future.
Next we get a peek into the employment situation with the release of the ADP Employment report. This data is similar to the official government report we get on Friday with a couple key differences. First, the ADP report is compiled by a private company, Automatic Data Processing, and not the government. Next, it only counts private payrolls and does not take into account government jobs. Historically, this report has varied greatly from the official report but it’s accuracy has been improving. Since jobs are so crucial to any economy, market participants track this report to get a gauge on economic momentum but it continues to be of much less significance than Friday’s official Employment Situation report.
Expectations called for a loss of 195,000 jobs, but ADP reports that our economy lost 203,000 jobs last month. The prior months figures were revised from an initially reported loss of 254,000 to -227,000. There was no reaction in the markets following the release.
The final data release today is the ISM Non-Manufacturing Index. This data is a survey of 400 non manufacturing firms across the country regarding the strength of their business conditions. Readings above 50 indicate expansion while reading below 50 indicate contraction. Recent reports have shown that non-manufacturing business conditions have been improving with last month’s report moving above 50 for the first time since the summer of 2008. Economists surveyed had expected to see continued improvement with a 51.6 reading but the actual reading came in lower at 50.6. With the Fed statement in a few hours, there was no reaction to this report.
Helping to keep the pressure on the fixed income sector to move lower is the announcement from the U.S. Department of Treasury regarding the size of the upcoming auctions next week. The announcement shows that they will offer $40billion of 3 year notes, $25billion of 10 year notes and $16billion of 30 year bonds which is basically in line with expectations. The added supply of debt in the market place will continue to pressure yields higher to attract buyers.
The big news of the day will be the Fed statement at 2:15est. Today is the conclusion of the Federal Open Market Committee’s 2 day meeting which occurs 8 times a year. At these meetings, our nation’s monetary policy is set. It is widely expected that they will maintain the current Fed fund rate of 0 to .25%. As always with these meetings, the statement that is released is scoured by market participants for any hint at future monetary policy and their outlook on the economy. I suspect today’s statement will be very similar to the last one. They will maintain the current rate “for an extended period” and caution about a slow and but steady economic improvement.
What are your thoughts on the FOMC statement?
Early reports from fellow mortgage professionals indicate that mortgage rates have moved higher this morning. The par 30 year conventional rate mortgage is in the 4.875% to 5.125% range for well qualified consumers. To secure a par rate you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including one point loan origination/discount/broker fee. You can elect to pay less upfront fees but your interest rate will be higher.
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