Market Comment
Mortgage bond prices moved considerably this week with rates rallying midweek as additional Treasury debt was absorbed. Foreign demand for the shorter-term auctions was surprisingly strong, while the longer-term auction was average. The US Treasury auctioned $963 billion of debt the first half of this year and is expected to offer $1.1 trillion in the second half. Weekly jobless claims were better than expected, which did not help mortgage bond prices. However, falling oil prices eased inflation fears and enabled mortgage bond prices to increase, which pushed rates lower. Oil was under $60/barrel last Thursday morning.

For the week, interest rates improved by about 1/2 of a discount point.

The consumer price index data Wednesday will be the most important data this week. Signs of inflationary pressures from any of the data releases will not bode well for mortgage interest rates.

Fed Minutes
In December 2004, The Federal Open Market Committee decided to reduce the lag time between the open market committee meeting and the release of the minutes from six weeks to only three weeks. The minutes from the meeting have the ability to cause mortgage interest rate fluctuation because they provide more policy details than the standard post meeting release. Most importantly, the minutes provide the Fed’s complete economic analysis and various opinions of individual Fed members. There is typically an overwhelming consensus among the members. However, there can also be dissension, causing uneasiness in the financial markets. The release often comes and goes without much uproar but if any of the text seems troubling to analysts, you can expect market changes.

Mortgage interest rates remain at historic lows. Capitalizing on current levels is wise amid the recent economic instability across the globe. Inflation fears could be stoked with continued Middle East tension and hurricane season heading our way. Inflation, real or perceived, generally does not bode well for mortgage bonds and could cause rates to rise.

Market Comment
Mortgage bond prices rose last week driving mortgage rates lower. The Treasury sold 104B in bonds, which were well received by foreign central banks. The indirect bidder participation, an indication of foreign demand, was near all-time highs.

For the week, interest rates fell by over a full discount point.

The employment report Thursday will be the most important release this week. The ADP employment report will also give a glimpse into the employment situation, though the two reports are derived from different data so there could be some divergence. Strength in other economic data will not affect mortgage rates.

GSEs
Government sponsored enterprises (GSEs) are financial services created by Congress. Two of the most important GSEs in the mortgage industry are Fannie Mae and Freddie Mac. These corporations were designed to make credit available to targeted borrowers in an efficient manor. Fannie and Freddie were completely privately owned. However actions by the Treasury and Congress within the last year now blur the ownership. The credit crisis left Fannie and Freddie with huge liquidity concerns. Drastic measures were taken to prevent total failure. The Treasury placed the GSEs in conservator, increased the lines of credit to the GSEs, and infused both companies with $100 billion for an ownership stake of 79.9%. This US Government ownership of these companies leaves many unknowns. While conservatorship implies temporary control, the Treasury exit strategy has yet to be revealed.

The supply and demand characteristics of Treasury bonds and mortgage-backed securities (MBSs) issued by Fannie and Freddie traditionally differ. Treasury securities represent money needed to fund the operations of the US government. MBSs, on the other hand, represent borrowing by homeowners. 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 terms of demand, Treasury securities are regarded as “risk free” investments, and often benefit from a “flight to quality” in times of financial crisis.

Market Comment
Mortgage bond prices remained volatile last week with trading tied to both the Treasury market and stocks. The Treasury market (10 and 30-year bonds) lost significant ground early in the week as investors fled the low yields, opting to purchase Mortgage Backed Securities instead. For the week, interest rates on government and conventional loans fell by 3/8’s of a discount point.

The consumer price index Friday will be the most important event this week. The bond market closes early Friday in observance of Martin Luther King Day on Monday, January 19th.

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 track these bonds as a barometer for mortgage interest rates. However, the Treasury and mortgage markets trade independently.

The supply and demand characteristics of Treasury bonds and mortgage-backed securities (MBSs) differ significantly. 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 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. Thus, differences between Treasuries and MBSs sometimes lead to misleading price change differentials.