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Your weekly MBS wrap, July 15

Bryan McNee, senior bond analyst for MBS Authority, presents your weekly MBS update, explaining moves on the mortgage bond market, what you can expect for the week ahead and how to adjust your business to stay ahead of the curve.

Video transcript below:

Bryan S. McNee, Senior Bond Analyst
Bryan McNee:  Hello I am Bryan McNee, Senior Bond Analyst for MBS authority.

Today July 15th and here is your weekly outlook here.  Okay what happened last week?  Well when the smoke cleared, mortgage backed securities gained 129 basis points.  Now remember when mortgage backed securities go up in price your interest rates get lower.  Why is that?  Well that’s simply because if you’re getting a conventional loan say a Fannie Mae loan you get your money from one and only one source and that is the sale of a Fannie Mae mortgage backed security, not a 10 year treasury, not any other instrument.  

So we need to focus specifically on what drives the specific rate for the type of loan that you’re getting and rates got lower last week.  Let’s take a look at why.  First of all let’s take a step back from last week to the week before where mortgage backed securities sold for less which meant you had higher rates. That was due in large part to the nonfarm payroll report.  

Last week we rebounded from our worst levels of 2013 due to a very choppy happy session. For the most part here we are 185 basis points gap between our worst pricing and our best pricing of the week. That’s a pretty [snifit] gap.  Wednesday, the FOMC Fed Open Market Committee minutes came out.  This is the minutes from the last meeting and it reminded traders out there that about half of the members of the Federal Reserve Open Market Committee wanted to start to taper mortgage backed security purchases specifically.  

They will probably leave treasuries alone for a little while longer and focus on pulling back, but still purchase them, but focus on pulling back in some small measure on the amount of monthly Fannie Mae mortgage backed security purchases for example. The market had started to discount that.  It’s very choppy here.  Two Fridays ago, non-farm payroll came out much stronger than expected.  Mortgage backed securities sold off because people expected the Fed to use that information to begin tapering sooner rather than later.  

Wednesday the FOMC minutes came out and once again it reminded traders that the Fed did in fact have growing sentiments see and the prior minutes from the last three four meetings, there has been one or two Fed members that had supported tapering.  In this minutes we know that we had about half of them. So even though the Fed didn’t actually change direction in what they were doing, there seemed to be a growing sentiment about the fact that they wanted and supported more than supported, pulling back on monthly bond purchases and of course when they actually do that, mortgage rates will start to go up, because they are the largest purchaser of mortgage backed securities, less demand means you got to have worse pricing.

Okay so Wednesday the minutes came out, reminded the market that tapering would come sooner rather than later in their minds and you had bad pricing as a result, mortgage backed securities sold off.  But they will reverse course at the very last minute on Friday before the bond market closed as Ben Bernanke was speaking about 100 years of the Fed and at the end in the Q&A session, he started to backtrack and try to ease the markets on the fact that nothing was imminent, that he wasn’t prepared to start tapering tomorrow type deal and mortgage backed securities reversed course, late Wednesday and all day Thursday as a result.

That improved your pricing and gave you lower rates.  Friday’s consumer sentiment index was weaker than expected, that also was supportive of better mortgage pricing.  But a rally was capped by that 10 day moving average, if you just sort of see that candlestick chart that we’ve got there.  That 10 day moving average has been very key.  We have only really traded above at a few times since May.
Now what’s on the agenda this week.  We started off today, mortgage backed securities sold off 30 basis points, which means higher rates for you.  But right after 8.30 Eastern Standard Time retail sales came out.  Retail sales weaker than expected, they did improve, they improved by 0.4%.  However the market was expecting an improvement of 0.8%.  So we missed by half and that weaker than expected economic news has investors and traders looking at their math again, trying to determine what the second quarter GDP numbers will be and they feel that it’s going to be weaker than they originally calculated, that is positive for pricing and mortgage backed securities gained so far 37 basis points.  That’s a 67 basis points swing from the worse levels of the day today.  

So it’s a good start to the week.  But what else do we have for the rest of the week.  Well tomorrow Tuesday, we have CPI, Consumer Price Index, a key measure of inflation.  A high reading there  is going to be bad for mortgage rates, a low reading is good for mortgage rates because bonds hate inflation and that’s a measure of inflation.  Also on Wednesday could be the pivotal day once again this week.  And what does that mean.  Well we have the Fed beige book which is always interesting, I mean for the colour of is binder, not because it’s boring like beige, but that beige book contains economic information from the different districts out there.  

Well we will have to read that, but it also is a, Ben Bernanke will be testifying for Congress, to sum our annual monetary policy.  Will there be any gems?  See on that Fed Meeting, his press conference when Ben Bernanke spoke after the Fed policy was released, the conference afterwards, mortgage backed securities sold off in a big way.  Then last Wednesday when he spoke after the minutes were released, mortgage backed securities rallied.  So last two times that he has spoken has directly impacted your pricing.  So what we need to do is focus on what he has to say in response to the questions being asked of him from Congress.  So that will be very key, probably for the whole week Thursday, you are going to have initial jobless claims and let’s see here, Friday I don’t think we have anything major coming up.  You’ve got, no nothing really major.  Friday except for the G20 meeting, G20 meeting will last over the weekend and generally there isn’t anything exciting coming out of there, but you never know, it’s always something to keep an eye on.

So interesting week to say the least.  We are trading above that very important 10 day moving average.  If we can close above it, it could signal that for this week, we could see some improvement, but remember, all this is temporary and it’s not long-term, it’s very short term, because long-term the economy is growing and long term the Fed will have to start shrinking the amount of monthly mortgage backed securities purchases.  These two events are happening at some in time in the near future, say 3 to 6 months.  When that occurs mortgage backed securities will resume their downward trend that we saw 3 weeks ago and put constant pressure on mortgage rates.  So we have to keep on top of things and of course we will report anything exciting that happens.

Have a fantastic week!  This is Bryan McNee for MPA TV.  Good bye.

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