July 28th, 2021 9:33 AM by Richard Sardella MLO.100007700/NMLS 233568
The day began with the 10-yr up 2 bps to 1.26%, while MBS prices lost 12 bps. This is about what we expected as a precursor of the FOMC and Jerome Powell’s press conference this afternoon. The FOMC will not do anything with interest rates, and it is way too early for the Fed to back off its low rate policy. There has been an increasing belief that the next significant move from the Fed is to begin reducing its $120B a month buying treasuries (mostly short term treasuries) and MBS securities; $80B of treasuries and $40B of MBSs. Mr. Powell has repeated numerous times over the last six weeks that the Fed doesn’t believe the economic rebound is complete and still needs the Fed’s assistance; not just the Fed but other key central banks around the world. Central banks see what is happening in equity markets, new all-time highs almost daily here in the US; supported by central bank’s low rates driving investors and recent earnings have been setting records for companies like Apple. The FOMC’s policy statement is likely to continue to reflect a positive outlook for growth as well as acknowledge higher inflation, while repeating that price gains largely reflect temporary factors.
The Fed now has another reason to hold steady; the Delta variant is spreading rapidly and threatening global growth. The meeting this afternoon will focus on the tapering of the monthly buying, and when to begin to reduce the amount each month. It will be slow and probably begin by lessening monthly MBS purchases. A few Fed officials recently commented that the housing markets no longer need the Fed -- remarks hard to square when Fed officials think it will slow down the overheated housing sector as a positive. Powell has said he will give markets plenty of notice before tapering.
In weekly MBA mortgage applications released this morning, there was a huge increase in re-fis. Not surprising. The composite increased 5.7%, purchase apps -2.0% while refinancing apps jumped 9.0%.
At 9:30 am ET the DJIA opened up +24, the NASDAQ rose +68, and S&P added +8. The 10-yr note stood at 1.26%. up +2 bp. The FNMA 2.0 30-yr coupon was down -6 bps from yesterday’s close and -2 bps from 9:30 am yesterday, and the FNMA 2.5 coupon lost -5 bps from yesterday’s close and +5 bps from the same time yesterday.
Reported by the WSJ this morning: Banks are beginning to sell a new kind of bond that shares the risk of mortgage and loan defaults with institutional investors. The bonds are backed by short-term loans that banks make to mortgage lenders. When those lenders’ borrowers default, the investors in the bonds effectively cover the loss. The transfers are a product of the effort to shield Fannie Mae and Freddie Mac from the risk of a mortgage-market reversal. Banks are now using them to raise capital and otherwise shore up their balance sheets, a process that ultimately adds to their lending capacity, analysts said. Investors lose if the underlying loans default but receive relatively high yields in return. The average yield that investors demand to hold the riskiest version of the investment is more than 5%. That compares with 1.89% for the 30-year U.S. Treasury and around 4% for corporate bonds, according to data from Intercontinental Exchange. The average yield on mortgage-backed securities was 1.36% as of July 22, according to an ICE Bank of America index. That compares with nearly 2.4% in February 2020.
Financial markets won’t move much now until this afternoon at 2 pm when the FOMC policy statement is released and shortly afterward at Jerome Powell’s press conference. There is always a chance of increased volatility after the meeting and press conference.
While our tech models continue to remain bullish, we have noted there isn’t a lot of strength behind them. More neutral than bullish. That said, we will continue to respect the positive bias.
PRICES @ 10:00 AM ET
10 yr. note: 1.26% +2 bp
5 yr. note: 0.73% +2 bp
2 Yr. note: 0.21% unch
30 yr. bond: 1.92% +2 bp
Libor Rates: 1 mo. 0.090%; 3 mo. 0.129%; 6 mo. 0.158%; 1 yr. 0.239% (7/27/21)
30 yr. FNMA 2.0: @9:30 101.73 -6 bp (-2 bp from 9:30 am ET yesterday)
30 yr. FNMA 2.5: @9:30 103.97 -5 bp (+5 bp from 9:30 am Et yesterday)
30 yr. GNMA 2.5: @9:30 103.56 unch (+3 bp from 9:30 am ET yesterday)
Dollar/Yuan: $6.4974 -$0.0138
Dollar/Yen: 110.17 +0.38 yen
Dollar/Euro: $1.1789 -$0.0028
Dollar Index: 92.68 +0.25
Gold: $1795.50 -$4.30
Bitcoin: 39,596 +1,596
Crude Oil: $71.94 +$0.29
DJIA: 34,977 -81
NASDAQ: 14,739 +78
S&P 500: 4397 -4
Richard Sardella has been actively managing and providing services in the mortgage industry for over 27 years. Richard serves on the board of directors as President of Colorado Home Mortgages Inc.
All information furnished has been forwarded to you and is provided by thetbwsgroup only for informational purposes. Forecasting shall be considered as events which may be expected but not guaranteed. Neither the forwarding party and/or company nor thetbwsgroup assume any responsibility to any person who relies on information or forecasting contained in this report and disclaims all liability in respect to decisions or actions, or lack thereof based on any or all of the contents of this report.
MLO of record MLO.100007700 / NMLS#233568 / CHM NMLS#127716.