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Friday 02-21-2014 Mortgage Market Daily Report

Mortgage Bonds are being pressured lower today as Stock prices continue to rise.
In the housing sector, Fannie Mae reported record earnings in 2013 and has paid back all of the bailout money owed to the Treasury. The Mortgage Bankers Association reported yesterday that foreclosure rates declined to the lowest level in six years.

In economic news, Existing Home Sales declined by 5.1% from December to January due to the disruptive and prolonged winter weather patterns, tight credit, limited inventory, higher prices and higher mortgage rates.

Today’s light calendar consists only of existing home sales which fell more than the expected -4.1% to -5.1% MoM following December’s gain of +1.0%. Treasuries are opening flat to yesterday’s close and experiencing little reaction to this morning’s data. The curve has mildly bear steepened with 5-Year yields have risen +2 bps with 7-Year following close behind at +1.5 bps.

Interest rate markets started the day with lower prices; the 10 at 9:00 2.77% +2 bp and making another run at key technical levels, 30 yr MBS price at 9:00 -11 bp from yesterday’s 15 bp price decline in the futures markets prior to the 9:30 open stock indexes were a little better. So far it hasn’t been a good week for interest rates and MBS prices, the last two weeks have seen the 10 yr note move from 2.68% on Friday 2/7 to 2.78% early this morning. The FOMC minutes released on Wednesday have added additional concern in the fixed income arena; the Fed holds a positive outlook for the economy this year and isn’t concerned that the recent slowing is anything more than weather conditions that will ebb soon. The FOMC made it clear that the Fed will continue to lessen the monthly purchase of MBSs and long dated treasuries (taper).

When the minutes of the Jan FOMC meeting were released Wednesday there was a comment that some of the members were discussing an earlier increase in interest rates than was previously expected as unemployment continues to decline. The comment led to a lot of initial concern in the markets; stocks sold off as did the 10 and MBSs. We were not impressed with the talk, the Fed will hold interest rates at zero to +0.25% through this year and likely into 2015. In the futures markets trade the odds of the FF rate being increased to 0.5% by this time next year are about 11%. The sale of $9B in 30-year Treasury Inflation Protected Securities yesterday the bid/cover 2.34, the weakest since October 2001 amid stagnant inflation and as the Fed reduces its bond buying.

The stock market opened a little better at 9:30 but quickly went negative, then just as quickly reversed again (see below for 10:00 levels). The 10 yr yield improved as stock indexes softened, at 2.76% down from 2.78% earlier, 30 yr MBSs at 9:30 -5 bps.

The only scheduled data today, Jan existing home sales expected down 4.3% from Dec, sales fell 5.1% from Dec to 4.62 mil units (ann.), estimates were for 4.70 mil. The median sales price $188,900, +8.1% yr/yr; the inventory level increased to 1.9 mil, based on the sales pace there is a 4.9 month supply; first time home buyers accounted for just 26% of sales, the lowest percentage since NAR has been keeping the data. NAR didn’t blame all of the decline on weather; they noted very tight credit and affordability. Tight credit is a result of Washington continuing to try controlling the economy; the affordability issue is due to low paying jobs with no prospects of increases.

Treasury will auction $109B of notes next week: $32B in two-year debt on Tuesday and$13B in two-year floating-rate notes; Wednesday $35B in five-year securities and $29B in seven-year notes on Thursday. Next week has a lot of data and Fed speakers each day; markets pay a lot of attention to what Fedsters say, especially those that are voting members on the FOMC. Janet Yellen is finally scheduled to complete her required semi-annual testimony on Thursday next week when she sits before the Senate Banking Committee. Her testimony has been delayed by over a week when she finally goes to the Senate. Her first appearance at the House Financial Services Committee didn’t reveal much other than she said the Fed would continue tapering asset purchases because she and the Fed expect better economic growth this year. That testimony occurred prior to the release of the Jan FOMC minutes, traders will be especially interested in her comments regarding the discussion in the minutes of an earlier increase in rates than had been previously thought.

The 10 and MBSs continue in their narrow ranges; the 10 is testing its key averages that still hold and al momentum oscillators are now at neutral levels since here has been no real change in rate markets going on to three weeks now.