The market giveth, and the market taketh away. Yesterday the MBS price jumped 32 bps, early this morning the MBS price at 9:00 -7 bp; the 10 yr yield fell to 2.51% yesterday down 3 bps, this morning +3 bps back to 2.54%. Yesterday the DJIA dropped 138 points, this morning the index is better as are the NASDAQ and S&P. No continuity or trend at the moment ahead of this afternoon’s FOMC minutes from the 4/30 FOMC meeting. At 9:30 the DJIA opened +81, NASDAQ +16, S&P +8; 10 yr 2.54% +3 bp and 30 yr MBS price down 5 bps from yesterday’s close.
The last week has not shown much change; the 10 in a 5 bp yield range, MBS prices over the past two weeks gripped in a 34 bp price range. The uncertainty is keeping financial markets in narrow ranges; worries over the economic outlook come and go with each news report on earnings and forward guidance and what will be a negative growth quarter in Q1 and not so much improvement in Q2. The treasury and mortgage markets are taking somewhat of a back seat these days as investors are reaching out for higher yields in corporate bonds that until recently were shunned like the plague. Now though with less of an optimistic outlook for equity markets the drive to seek higher returns are pushing investors into markets that used to be considered too risky.
Weekly mortgage applications increased a little last week, +0.9%. The Refinance Index increased 4% from the previous week. The seasonally adjusted Purchase Index decreased 3% from one week earlier. Nice for the re-financers but the decline in purchases isn’t encouraging; purchase applications -12% from the same week a year ago. The refinance share of mortgage activity increased to 52% of total applications from 50% the previous week. The adjustable-rate mortgage (ARM) share of activity remained unchanged at 8% of total applications. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.33%, the lowest rate since November 2013, from 4.39% with points decreasing to 0.20 from 0.22 (including the origination fee) for 80% loans. The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,000) decreased to 4.24%, the lowest rate since May 2013, from 4.29%, with points decreasing to 0.1 from 0.16 (including the origination fee) for 80% loans. The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA decreased to 4.06%, the lowest rate since October 2013, from 4.09%, with points decreasing to -0.39 from -0.17 (including the origination fee) for 80% loans. The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.43%, the lowest rate since October 2013, from 3.48%, with points increasing to 0.15 from 0.12 (including the origination fee) for 80% loans. The average contract interest rate for 5/1 ARMs decreased to 3.14% from 3.17%, with points increasing to 0.29 from 0.24 (including the origination fee) for 80% loans.
Fed officials out in force today; there are four officials speaking. Janet Yellen at NYU commencement won’t take questions and not likely to rattle markets. Bill Dudley, NY Fed, Esther George, Kansas City, and Narayana Kocherlakota, Minneapolis Fed. Nothing else on the schedule until 2:00 when the key FOMC minutes from the /30 FOMC meeting.
Russia out saying all of its troops will be back to their bases by June 1st. Ukraine will hold its presidential election on Sunday.
We remain bullish on the bond and mortgage markets but we have to accept that the bellwether 10 is still not able to fall below last November’s low (2.48%). 2.50% on the 10 at the moment is finding resistance until there is another soft economic report. Investors, as noted above , are seeking higher yields in corporate debt and other higher risk debt issues. The belief that drives investors to risk is that even if treasury rates decline there won’t be any serious economic decline or geo-political event that will shake markets too much. It is another example of money chasing yields and willing to risk it.
There isn’t likely to be any change in markets until 2:00 this afternoon when the FOMC minutes are released. At 10:00 the stock market has gained back all of what the indexes lost yesterday. Neither stocks or bonds have changed in any significant way in the last few weeks; the DJIA and S&P made new all-time highs on May 12th, then selling took the DJIA down 300 points. The 10 in a 10 bp yield range.