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Friday, October 30, 2015

Mortgage Bond Market Analysis - TGIF

It's Friday.  While that doesn't mean a lot for people in the real estate and lending industries since we often work nights and weekends (I was working on loan scenarios for clients until about 10:00 last night), it does mean that the mortgage bond market can take a breather from getting beat up the last two days.  Wednesday afternoon I recommended locking in advance of any further sell-off (some lenders allow clients to float down after they have locked assuming the rate has improved by a minimum amount).  The FNMA benchmark bond sold off an additional 33 basis points in addition to the 41 it sold off on Wednesday.  The total of the sell-off is equivalent to about .125% in rate AND .25 in points.  Hence, if a client was looking at a par rate of 4.25% on Tuesday, they would be looking at about 4.375% with a .25 point cost after yesterday's move.

This morning, more mixed data is out with Core PCE, Personal Spending and Personal Income all narrowly missing expectations by .1.  The Chicago PMI broke out from its previously weak readings in a big way with a 56.2 (previous readings were below 50 which is really bad as a number below 50 shows contraction).  This would normally be really bad for bond prices but with two previous days of selling and a slightly weaker-than-expected GDP number yesterday (1.5 vs. 1.6 estimates) in addition to a lower Michigan Consumer Sentiment Index (90 vs. 92.5 estimate), the benchmark bond is showing a bit of resiliency as it is up 17 basis points (GNMA up 8 basis points).  It's quite possible that we might be in the midst of a new narrow trading range - we won't know for sure until we've been in it for a number of days but the headwind is the Atlanta Fed president blustering that a rate hike is all but certain in December and the GDP is getting closer to the target rate of 2% so there could be some validity there.  On the contrary, there isn't any really strong economic data anywhere in the world.  Data is usually mixed and when it is good, it's not real strong.  A vote of 9-1 on Wednesday against a rate hike shows that 5 people have to change their mind in December for the Fed to make a move so bond traders will be looking for some definitive data to make any big moves but I think the upside is limited and there is much more risk to the downside.  Traders don't want to be the last one to leave the party since they'll be stuck with the tab.  I would lock on any positive improvement with the thought of floating down if rates improve.

That's all for now.  Hopefully the Mets can win game 3 of the World Series and turn it around.  The Utes play their annual blackout game tomorrow against Oregon State - I'll be there cheering them on with my family (look for me if you watch the game on TV - I'm in the front row of the OSU section since OSU returned some tickets; they didn't want to travel to watch their team get whooped).  Make it a great day and a better weekend.  Call me if I can help with anything mortgage related or if you want to talk sports or music - 702-812-1214 or 801-853-8720.

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