Want to get Market Trends as soon as it’s published on Friday? Get it via email — subscribe here!
March 20, 2009 — Without usual policy tools at its disposal, the Fed again weighed heavily into mortgage and bond markets. At the close of its meeting Wednesday, The Fed announced an extension of its plan to buy up Fannie and Freddie-issued debt and mortgage-backed securities offered by the GSEs as well as Ginnie Mae (FHA-backed product) and detailed a long-rumored plan to start purchasing certain Treasury securities.
Conforming mortgage rates moved into record territory again this week. After falling to a new daily low average rate of 4.94% on Thursday, HSH’s weekly average for 30-year FRM conforming money also managed a 13-basis point dip to 5.07% + 0.28 points, while the overall average for fixed-rate mortgage money (expressed as HSH’s Fixed-Rate Mortgage Indicator) slipped back by seven basis points, landing at 5.62%. The FRMI’s 5/1 Hybrid counterpart moved backward by six basis points to 5.36%, while Federally-unsupported jumbo 30-year FRMs remained steady for the week.
The Fed originally announced a $600 billion mortgage support plan back in November 2008, with $100 billion available for GSE debt and $500 billion for MBS purchases. The plan kicked in in early January, and since then the Fed has been accumulating MBS at about $4 billion per day, with estimates that they have used up about $200 billion of the original $500 billion commitment. At such a pace, it’s easy to plot on a calendar just when that original commitment would come to a close — somewhere in May or June. At about $100 billion per month, and with an initial expiry in a month or two, we believe that the Fed’s new $750 billion represents an enduring commitment to this program at least until the end of the year and perhaps slightly beyond. The total of $1.25 trillion may very well mean that virtually all MBS originated this year will find a ready buyer, financial market stress or not.
While there was some anticipation that mortgage rates would fall sharply as a result of the program, we note that the Fed didn’t say that they were going to pick up the velocity of their purchases (although they well could). Rather, we think that they wished to signal to the bond market and consumers that rates would remain low and stable for the foreseeable future, and that there will be an entity that will support the good-credit quality mortgage markets.
In a surprise move, the Fed also announced that they would be buying up $300 billion of “longer-dated” Treasuries over the next six months in order to “help improve conditions in private credit markets.” We don’t think that this move was specifically aimed at lowering mortgage rates (although if that happens as well, they wouldn’t complain). Rather, with many commercial financing arrangements keyed off Treasuries, it appears that the Fed is hoping to lower the cost of business-related credit and spur both borrowing and lending.
In the months ahead, a huge cascade of new debt is going to be coming into the market at a time when demand could very well be finite, given the ongoing scarcity of capital. In the bond market, when supply overwhelms demand, interest rates have no place to go but up in order to hopefully coax reluctant investors into snapping up new debt. We believe that the Fed’s move yesterday was to inform the market that at times of high supply, there will be a “sponge” available which can absorb excess supply, thereby serving to keep interest rates from rising and promoting stability in yields.
The announcement did spark a sharp rally in Treasuries, with the 10-year Treasury yield falling nearly 50 basis points (0.50%), the largest such one-day rally in better than two decades. In the past, fixed mortgage rates have closely followed the 10-year yield both up and down, but regular Market Trends readers know that the once-lockstep relationship between those two instruments has become much more tenuous in the past year or so, meaning that the influence of one on the other is weaker than usual. No clearer example can be seen than the move in the 10-year Treasury from a daily low of 2.23% on January 16 to a high of 3.02% reached last Tuesday (3/17), a rise of nearly 80 basis points. Over that period, fixed mortgage rates rose only from 5.10% to 5.51% on Feb. 6, a move fostered largely by a surge in demand. Since then, rates have generally been falling as those refi surges have worked their way through the system. With this fractured relationship in place, we expect only perhaps half of the decrease in Treasuries to make its way into mortgage rates, and that seems to largely have occurred already. Rates moved from a pre-announcement 5.15% on Wednesday to 4.94% on Thursday, a 21-basis point slide.
As we’ve here several times since November, these “headline events” from the government tend to spark a surge in borrower demand, which in turn overwhelms still-unprepared lending systems and personnel. Falling rates bring in borrowers, the system fills up, and interest rates begin to rise somewhat as lenders begin to hike their prices enough to dampen the demand (and perhaps enhance profitability a bit). Any retailer knows that there’s no need to run a sale when the store is already full of people. Supply and demand dynamics play into this, too; more demand coming into the face of finite immediate supply means that the value (rates) of that still-dear supply can rise to some degree.
Visit the HSH Finance blog for daily updates, consumer tips, and other things you need to know.
Daily FRMI rates are available at HSH.com. News outlets who want daily statistics for conforming or jumbo mortgages should contact HSH for more information.
As seen in December and again in January, we think this will likely again be the case. This is one reason why the Fed’s enduring GSE and MBS commitment matters so greatly; low and fairly stable interest rates should remain available in the market, and even if a borrower failed to capture rates at a near-term bottom, another opportunity will likely present itself in the not-too-distant future. Absent an upwelling in industry capacity (unlikely given the impermanence of demand), it’s likely that this scenario will be repeated, at least until a majority of borrowers who can get financing in today’s market have done so.
Almost as a footnote, the long-awaited Term Asset-Backed Securities Lending Facility (TALF) plan kicked in this week, with about $4.7 billion requested by investors looking to purchase certain asset-backed securities.
Fast on the heels of that, the Fed announced on Thursday that the next leg of the program would include funding for mortgage servicing advances, commercial equipment leases and certain automotive-backed financing. Those bids are due by April 7, and it’s expected that the program will continue to be expanded to include other types of loans and securities, including certain non-conforming mortgage loans. Even though the initial program started small, getting buyers and sellers together is a crucial step in establishing the values of these assets, and could prompt other parties to come to the table as well.
All of these market manipulations weren’t without concern, though. We noted a sharp rise in the price of gold and oil after the Fed’s announcement. Gold is a classic hedge against inflation, and lately oil seems to be used the same way. Although broad price pressures have largely been diminishing of late, there is a considerable potential for rising inflation down the road from here, and at least some investor money seems to have moved into a more defensive position for the moment.
Economically, we keep waiting for more regular signs of stability, but they continue to be far and between. However, we did manage to see a few this week, including some related to housing.
Our Statistical Release features charts and graphs
|Current Adjustable Rate Mortgage (ARM) Indexes|
|Get the indexes & financial indicators you need from ARMindexes.com.
Email and webservice delivery are available.
Sources: FRB, OTS, HSH Associates.
The National Association of Homebuilders index of member sentiment came in at a still-low reading of 9 for March. However, that joined a string of similar numbers posted in four of the past five months (one was only 8) but the pattern of continue decline has stopped, replaced instead by a by a flat one. No one expects a sudden rebound in optimism by builders, but the leveling-off is a better sign, regardless.
Also a good sign was the slight rebound in housing starts during February. Initiation of new construction came in at a 580,000 annualized pace, a 22% increase over last month, but still left us at about December’s awful levels. Single-family starts barely budged, but multifamily (condo, townhome) starts did move the number higher. We have speculated that remaining inventories of unsold new homes were those which were least desirable (longest commuting distance, too big, too expensive, unfinished development, etc) and therefore the hardest to sell. That continues to be the case, but the building of new inventory may signal that the number of desirable properties has been reduced to the point that at least some construction needs to take place. If nothing else, a bounce off the bottom is a welcome sign. Permits for new building in the future also return to December levels, a slight increase.
Readers concerned about outright deflation should be comforted by the change in price trends. The Producer Price Index nudged 0.1% higher during February, the second positive reading after a string of five months of declines. Compared to last year, prices are still 1.6% lower but that figure should start to temper as we move forward. Core PPI moved 0.2% higher for the month and prices measured here are 3.9% above last year.
Consumer Prices bumped 0.4% higher during February as gasoline and food prices moved up after a couple month downdraft. Core CPI, a measurement missing those unpredictable elements, rose by half that much. Consumer prices sported outright annualized declines in December and January but have moved back to the positive side of the book, and core CPI is running at a 1.8% annualized rate.
The energy-price led inflation push of 2007-2008 has been largely wrung out of the market, but oil has recently moved from the upper $30/barrel range back to about $50/barrel, so inflation should also continue to firm (at least somewhat) even in the face of weak aggregate demand in the economy.
Industrial Production posted another decline in February, falling by 1.4%. That’s not especially good news, but it was the smallest such decrease since November and the sizable portion of it was due to lower utility output as a spate of warmer weather covered much of the US during the month. Manufacturing declined by 0.7% (the smallest loss since October) and mining activity eased 0.4% (best since November). It’s not quite an improvement per se, and not even a leveling off of decline by any means, but there does seem to be a slowing in the rate of descent. More factory floor space was idled during the month, and now just 70.9% could be considered active — the lowest figure since about 1982.
Continuing declines in manufacturing output do seem likely, after a New York State purchasing managers group noted another decline in activity during March. A less-steep decline was seen in the Philadelphia Fed’s survey of action in their district, as their index improved from -41.3 to a slightly less lousy -35.0 for the month.
Reaching highs not seen since October, the weekly ABC News/Washington Post poll of Consumer Comfort rose to -47 for the week of March 15. It’s not exactly soundly breaking out of the recent range, but a near six-month high is notable, even if it might only be due to daylight saving time kicking in a little early this year (or a couple extra dollars in stimulus in the paycheck). Whatever the case, here’s hoping for more.
That increase in optimism might be unfounded, if the decline in February’s index of Leading Economic Indicators proves true. The 0.4% decline (and downward revision in January’s gain) suggests that sustained economic improvement is still a thing of the future, even if the decline could be counted among the smallest of the past year.
New claims for unemployment benefits have leveled off for at least the moment, but at terrible levels. The 646,000 new applications filed at state windows last week was about the same as those seen over the last seven weeks, so the labor market is still declining strongly, but at least not at an accelerating pace of late. For those laid off, new work is very tough to find, and continuing claims, now 5.47 million, continue to climb steadily.
Where do we go from here? We’ll continue to say that, absent any new government program (such as the one to buy Treasuries, or the expansion of the TALF this week) mortgage rates largely remain rangebound at about these levels. That huge one-day rally in yields may or may not prove durable, the Treasury’s influence on mortgage rates isn’t especially reliable and volume issues could again nudge rates higher from this level in the period just ahead. For next week, we think that may start to occur amid reports covering new and existing home sales, final revisions to Q408 GDP, durable goods orders and some other fresh data. Expect at least a few basis point increase or so in average rates.
What might happen to markets and rates over the next couple of months? Read our latest two-month forecast to find out.
And for today’s top stories, see our HSH Finance blog. For a longer-term analysis, check out our Two-Month Forecast.
Popularity: 19% [?]