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Mortgage Market in Review – February 9, 2015

Market Comment

Mortgage bond prices finished the week lower last week which pushed rates higher. Rates started the week on a positive note in response to data Monday. The ISM Index was 53.5 versus the expected 54.7 which helped rates fall. Unfortunately the rate improvements were short-lived and rates turned upward as economic conditions in the euro zone rebounded amid the recent quantitative easing measures taken by the European Central Bank. The employment report Friday sent rates even higher. Unemployment came in at 5.7% versus the expected 5.6% mark. Non-farm payrolls rose 257K versus the expected 235K. Average hourly earnings rose 0.5% versus the expected 0.3% increase which added fuel to the fire. Mortgage interest rates finished the week worse by approximately 3/8 of a discount point amid significant volatility.

LOOKING AHEAD

Economic
Indicator
Release
Date & Time
Consensus
Estimate

Analysis
3-year Treasury Note Auction Tuesday, Feb. 10,
1:15 pm, et
None Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
10-year Treasury Note Auction Wednesday, Feb. 11,
1:15 pm, et
None Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
Weekly Jobless Claims Thursday, Feb. 12,
8:30 am, et
282k Important. An indication of employment. Higher claims may result in lower rates.
Retail Sales Thursday, Feb. 12,
8:30 am, et
Up 0.2% Important. A measure of consumer demand. Weakness may lead to lower mortgage rates.
Business Inventories Thursday, Feb. 12,
10:00 am, e
Up 0.2% Low importance. An indication of stored-up capacity. A significantly larger increase may lead to lower rates.
30-year Treasury Bond Auction Thursday, Feb. 12,
1:15 pm, et
None Important. Bonds will be auctioned. Strong demand may lead to lower mortgage rates.
U of Michigan Consumer Sentiment Friday, Feb. 13,
10:00 am, et
97.9 Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.

Auctions

US Treasury bonds do not directly dictate fixed mortgage interest rate pricing however they do have an indirect impact. Treasuries are used as a hedge for the interest rate risk associated with mortgage-backed security investing. Mortgage-backed securities have the potential for prepayment that Treasuries do not. Both Treasuries and mortgage bonds often track in the same direction but this is not always the case. There are many times that Treasuries and mortgage bonds move inversely.

Despite the overwhelming size of the US economy, foreign investors can still have an effect on moving the financial markets. When foreign economies struggle foreign investors often purchase US based investments including mortgage bonds. This demand usually causes mortgage bond prices to rise and interest rates to fall. This flight to quality buying is one of the factors helping mortgage interest rates remain historically low.

Continued global economic turmoil will be a factor in the health of the US economy. How that all plays out is still uncertain.

The Treasury auctions this week will be important in determining the current appetite of foreign investors for dollar denominated debt securities. Demand has been generally good as of late but auctions of different durations often vary in their results. Mortgage bond prices could fall pressuring mortgage interest rates higher if the auctions this week are poorly bid. The inverse is also true. Be alert heading into the auctions.

Copyright 2015. All Rights Reserved. Mortgage Market Information Services, Inc. www.ratelink.com The information contained herein is believed to be accurate, however no representation or warranties are written or implied.