Market Comment
Mortgage bond prices rose last week, pushing mortgage interest rates lower. The bond market was buoyed by the announcement that US Treasury increased Fannie Mae and Freddie Mac credit lines to a total of $400 billion. This was a signal to investors that these entities are “too big to fail”, as viewed by the Treasury. We saw some weakness Thursday afternoon as retailers reported stronger than expected holiday sales. The employment report Friday was generally bond friendly.

For the week, interest rates fell by about 1/4 of a discount point.

The inflation data Friday will be the most important economic data this week. Signs of stronger than expected inflation would not be positive for mortgage interest rates. The Treasury auctions will also dominate trading. Stronger than normal foreign demand could bode well for the overall level of interest rates.

Employment Results
The December employment report came in relatively bond friendly. Unemployment came in at 10% as expected. However the payrolls component showed job losses of 85,000 compared to the 35,000 losses expected by analysts. The mortgage bond market had a generally positive reaction to the report but improvements in rates were tempered by concerns for some of the revised data from prior months. Revisions to the November figures showed a 4000-job increase as opposed to the original 11,000-job decrease.

Market Comment
Mortgage bond prices fell last week pushing mortgage interest rates higher. The bond market was choppy most of the week as thin trading conditions magnified movements. We started the week with rates heading higher Monday. Fortunately there was a bit of a rally Tuesday and Wednesday as the Treasury auctions were decent. Those gains were short-lived as the weekly jobless claims figure wasn’t as bad as expected. The bond market closed early Thursday and was closed the entire day Friday.

For the week, interest rates rose by about 1/4 of a discount point.

ISM Index data will set the tone for trading this week. The employment report will be the most important release but it doesn’t arrive until Friday. This will be the first full week of trading this year. It will be interesting to see how traders react to the recent spike in rates following the various shortened trading sessions.

The Year Ahead


This year begins in a similar fashion to last year. Last year at this time, 30-year fixed rate mortgage interest rates were historically low. Most pundits predicted little or no opportunities for additional refinancing. Mortgage interest rates spiked higher throughout the year, but overall, the Fed did an excellent job of keeping rates in check. Unfortunately the Fed’s $1.25 trillion mortgage backed securities (MBS) purchasing program is nearing the end. 30-year fixed rate mortgages remain low, though future predictions are all over the board.

However, mortgage interest rates could drop considering the Fed still has a few hundred billion dollars of MBS purchasing left. However, we are in unprecedented times. The Fed has signaled they want rates to remain low but also want to exit the market. The Fed isn’t the only player in the mortgage bond market and there are many others buying and selling the securities. Moreover, the Fed does not directly dictate that mortgage interest rates will be at a certain percentage. Rates are determined by the supply and demand for mortgage-backed securities.

The Fed kept rates in check for 2009. The big unknown is how they will exit the market without causing major disturbances this year. Without the Fed buying mortgage bonds, rates may head considerably higher. Now is a great time to take advantage of favorable rates.

Market Comment
Mortgage bond prices fell last week pushing mortgage interest rates significantly higher. We saw selling pressure almost the entire week as housing and factory orders data was stronger than expected, the Fed Chairman mentioned rate hikes, and weekly jobless claims beat estimates. To top the already negative week, the employment report came in stronger than expected causing rates to spike even higher Friday morning.

Interest rates finished the week worse by about 1 and 1/2-discount points.

The continued Treasury auctions will gain a lot of attention this week. If foreign demand for the debt is weak, we could see rates head higher. The first portion of the week is light regarding economic releases, but the trade data Thursday and retail sales data Friday have the potential to result in mortgage interest rate fluctuation. Be alert throughout the entire week.

Are Rate Hikes Coming?
The biggest fear of bondholders is inflation. Real or perceived, inflation erodes the value of fixed income securities causing prices fall and rates to rise. And the housing sector of the economy would certainly not benefit from escalating mortgage interest rates. Unfortunately comments from Fed Chairman Bernanke have many traders concerned that rate hikes are on the way. Bernanke indicated the Fed would follow a “rolling exit process”, in which special programs run down and ultimately implement a tightening policy. He went on to mention raising rates and indicated the Fed will cut back and close emergency lending programs as the markets normalize. The reaction to these remarks was fast and furious as mortgage interest rates shot higher.

While it is almost inevitable that the Fed will eventually raise rates, no one knows when that will occur. However, many traders took Bernanke’s remarks as a warning of things to come sooner rather than later.

Despite the recent rate increases last week, rates remain historically favorable. Lower rates are not guaranteed and floating in this environment is very risky.

Market Comment
Mortgage bond prices rose last week pushing mortgage interest rates lower. The economic data continues to be mixed. Personal income, outlays, and PCE inflation data were stronger than expected. Thin trading conditions, news of the looming debt crisis in Dubai and a continued influx of Fed money into the mortgage bond market helped rates improve.

Interest rates finished the week improved by about 1/2 of a discount point.

There will be many important economic releases this week, such as the employment report. Significant reports often lead to market volatility. Be alert throughout the entire week.

Fed “Beige Book”
The Fed “Beige Book” is a summary of economic conditions from each of the 12 Federal Reserve regional districts. The release takes place eight times a year approximately two weeks ahead of each of the Federal Open Market Committee (FOMC) meetings. The report is used at the FOMC meetings, which tends to be one of the most influential events in the market.

Market participants are continually attempting to determine what FOMC interest rate policy will be ahead of the next meeting. Any deviation from expectations usually results in extreme short-term market fluctuation. The timing of the “Beige Book” provides analysts a valuable look at one of the many factors the FOMC considers in setting interest rate policy. If the “Beige Book” shows signs of inflationary pressures, the Fed’s ability to keep rates lower may be somewhat restricted. However, if the report shows signs of difficulties, the Fed may keep rates low to stimulate the economy.

The “Beige Book” release on Wednesday should provide market participants with valuable insight into what the Fed will do and how mortgage interest rates will respond in the short-term. Be cautious heading into this and the other important releases this week.

Market Comment
Mortgage bond prices were near unchanged for the week amid very choppy trading conditions. Stronger than expected factory orders and ISM Index data were generally not bond friendly and attributed to higher rates in the middle of the week. Fortunately the Fed indicated the continued desire to keep rates low for an extended period. In addition, higher than expected unemployment and more payroll losses than expected helped mortgage bonds rally Friday.

For the week, interest rates remained virtually the same.

The record debt auctions Monday, Tuesday, and Thursday will once again take center stage as the Veterans holiday Wednesday splits the trading week in half. Strong foreign demand remains necessary for interest rates to stay relatively low. The trade data Friday will also be important.

Trading This Week
Market conditions that often lead to mortgage interest rate fluctuation are thin trading and shortened trading weeks. If very few market participants are buying and selling bonds, the potential for short-term volatility is escalated. A large buyer or seller can execute trading orders that, without additional traders to buffer out the extreme buying or selling, can lead to swift market movements. In addition, shortened trading weeks have the potential to compress a week’s worth of trading into fewer days. Bond traders often take defensive positions ahead of weekends and holidays to guard against unforeseen events that could possibly jeopardize their investments. This positioning can be beneficial or detrimental to mortgage interest rates. If investors sell stocks and buy mortgage-backed securities, mortgage interest rates will improve. However, if investors sell mortgage-backed securities and hold cash positions, mortgage interest rates will rise.

Holidays can often result in volatility as trading resumes following the extended close. The Fed continues to reinforce its goal of low interest rates. It is hard to argue they have not been effective with that goal so far this year. That doesn’t mean we haven’t and won’t see any interest rate fluctuation. Recent history attests to spikes and drops in rates throughout the year even with the Fed pumping $1.25 trillion in mortgage bonds. The big unknown remains when and how the Fed will exit the market without severe disruptions. Fed officials admit the future remains uncertain.

This week could result in market swings that are favorable or negative in nature. Considering the heightened possibility for mortgage interest rate fluctuation, a cautious approach to interest rate exposure is prudent.