Market Comment
Mortgage bond prices fell again last week pushing mortgage interest rates higher. The Fed ended the mortgage backed securities purchase program last Wednesday. There was no coincidence that rates spiked higher Thursday morning with the Fed no longer there to buffer negative movements and keep rates in check. Stock strength also pressured bonds as the Dow approached the 11,000 mark.

Escalating oil prices also caused rates to spike higher as inflation fears began to increase. Fortunately the PCE Price Index data came in as expected.

Rates rose about 3/4 of a discount point for the week.

The Treasury auctions will once again take center stage this week. If foreign demand is lackluster like the last few auctions, we could see that carry over to the mortgage bond market causing rates to spike. The Fed minutes and weekly jobless claims may also move the market this week.

Treasuries
The 10 and 30-year Treasury bond yields are often viewed as “benchmarks”, reflecting the overall state of interest rates in the US economy. Many people concerned about mortgage interest rates track these bonds as a barometer for mortgage interest rates. However, in reality the Treasury and mortgage markets trade independently.

The supply and demand characteristics of Treasury bonds and mortgage-backed securities (MBSs) differ. Treasury securities represent money needed to fund the operations of the US government. MBSs, on the other hand, represent borrowing by homeowners. Demand for mortgage credit is seasonal and is also affected by the state of the overall economy. In terms of demand, Treasury securities are regarded as “risk free” investments, and often benefit from a “flight to quality” in times of financial crisis. Treasury bill, note, and bond prices are dictated by yield requirements and inflationary concerns. Because homeowners can sell or refinance their homes, investors in 30-year mortgage-backed securities usually see principal repayment in significantly shorter periods of time.

In the absence of information directly related to the mortgage interest rate markets, Treasury information can be useful. However, mortgage interest rates can vary significantly. In fact, many times the Treasuries will trade wildly while MBSs only see minor price changes and vice versa.

Market Comment
Mortgage bond prices rose last week helping mortgage interest rates improve slightly. We started the week on a positive note with rates falling amid tame inflation readings. The producer price index fell 0.6% and the core rose 0.1%. The headline figure was the lowest since July 2009. Weekly jobless claims showed employment remaining poor. Unfortunately we saw the market fall a bit pushing rates higher Thursday afternoon, following the upcoming Treasury auctions announcement.

Rates fell about 1/8 of a discount point for the week.

The durable goods and gross domestic product data will be the most important releases this week. Supply concerns will continue to weigh heavily upon the bond market with the continued record Treasury auctions. If foreign demand falters, mortgage interest rates could rise.

Gross Domestic Product
The Gross Domestic Product (GDP) is one the most important reports during any given quarter. GDP is a measure of US economic output and spending. The report is significant in that it provides investors, analysts, traders, and economists with a comprehensive report of the direction of the economy. In addition, it also influences the decisions of Federal Reserve policy makers, Congressional budget employees, and corporate financial planners.

GDP is the sum total of goods and services produced by the United States. The initial report is often based on incomplete data. Therefore, additional revisions are released over the following two months. There are often substantial differences between the initial release and the revisions. The mortgage-backed security market generally responds favorably to weaker GDP growth.

While revisions generally don’t move the market like the original release, they still have the potential to cause market fluctuation if vastly different from the prior releases. Be cautious heading into the data this week.

Market Comment
Mortgage bond prices fell last week applying slight upward pressure on home loan rates. The market remained very volatile within a narrow range. Oil remained above $80 a barrel, reigniting inflation concerns. The retail sales report released Friday was better than expected, indicating the US economy may be getting stronger.

Rates rose about 1/8 of a discount point for the week.

The Fed meeting Tuesday afternoon will be the most important event this week. The inflation data from both the consumer and producer sides will also take center stage. If inflation remains in check, mortgage bonds could benefit.

Producer Price Index
The producer price index (PPI) is a measure of prices at the producer level and is important because it is the first inflation report to be released each month. Investors are typically able to gain an initial indication of inflationary pressures from the release. If producer prices increase, there is a tendency for producers to pass the increases on to consumers in the form of higher priced goods. It is important to note that the PPI is only a measure of goods, while the consumer price index (CPI) is a measure of goods and services.

It is possible for the price of goods to remain stable, while the price of services increases. In this scenario, PPI would do little to warn of a change in inflationary pressures, while the CPI report would provide an indication of the inflationary effects of the service component. This distinction between the two reports shows why most analysts view the CPI as a more accurate indicator of inflation. Nevertheless, market participants still gain valuable insight into potential fluctuation in the financial markets from the PPI release.

Be cautious heading into the inflation data and Fed meeting this week.

Market Comment
Mortgage bond prices rebounded last week, pushing mortgage interest rates lower. The majority of the data came in bond friendly. Tuesday’s weaker than expected consumer confidence data helped mortgage interest rates improve. The Treasury auctions showed decent foreign demand. The gross domestic product price deflator component showed a smaller price increase than expected. Consumer spending component also came in weaker than expected. Existing home sales fell a surprising 7.1%, considerably weaker than the expected 1% increase.

Rates fell about 3/4 of a discount point for the week.

The employment report Friday morning will take center stage this week. Until then, look for the PCE inflation data to set the tone for the beginning of the week and the ADP employment report to set the tone for the mid portion of the week.

Fundamental Week
The abundance of fundamental data this week provides a good opportunity for mortgages to improve. If the data shows weakness in the economy with little or no inflationary pressures then it is possible for mortgage bonds to rally resulting in mortgage interest rate decreases. However, if the data shows that the economy is rebounding or any significant signs of inflation, mortgage bonds may fall, pushing mortgage interest rates higher.

Mortgage interest rates remain favorable. Now is a great time to avoid the uncertainty surrounding continued market fluctuation.

Market Comment
Mortgage bond prices fell last week pushing mortgage interest rates considerably higher. The bond market took a hit as inflation concerns emerged after the stronger than expected producer price index data. Producer prices surged in January amid higher energy costs to almost double expectations. The Fed made a surprise rate hike to the discount rate that also resulted in mortgage rate increases. The only positive was the tame consumer inflation reading Friday morning, but we were unable to rebound from the earlier losses.

Unfortunately, rates rose over a full discount point for the week.

This Tuesday’s consumer confidence data will set the tone for trading this week. New home sales, weekly jobless claims, and the gross domestic product data may also move the financial markets. The Treasury will auction $118B in 2/5/7-year notes starting Tuesday. The additional supply may cause interest rate fluctuation.

Fed Action Causes Uncertainty
The Federal Reserve caught market participants by surprise with their 25 basis point discount rate hike last week. While analysts were split on whether the Fed would raise rates this year, that question has now been answered. The move resulted in fluctuation in most of the US financial markets.

The discount rate is the interest rate charged to commercial banks on loans they receive from the Fed. The rate hike is an effort to pull back the aid provided by extraordinary low rates amid the global economic decline. The Fed specifically noted the move was needed “in light of continued improvement in financial market conditions.” Many analysts noted the earlier warnings from Fed Bernanke that rate hikes were coming but very few, if any, expected the move this soon.
While the rate hike resulted in mortgage bond price weakness in the short-term, the long-term outlook is less certain. Most analysts believe inflation remains in check, but at the same time the Fed purchasing of MBS will soon be over. A cautious approach to “float” and “lock” decisions is prudent, given current market conditions.