May 19, 2011

Recap of Interesting Rate Week So Far

May 19, 2011

Recap of Interesting Rate Week So Far

After a four week rally that set new 2011 lows, rates are up slightly on net mortgage bond selling since yesterday. Bond yields (or rates) are now back up to the previous 2011 low level set March 16 after the Japanese earthquake and ‘not-a-war’ in Libya reached peak panic levels.

Rates drop when bond prices rise, and bond prices haven’t moved above their 200-day moving average since first touching it May 5 and a few times since. At these levels, bonds had been priced for perfection so they’re extra sensitive to data this week. Below is a data recap explaining why bonds have net sold, nudging rates up.

On Monday, the New York Fed’s regional manufacturing survey showed that inflation was an issue but the Greece bailout outweighed any concerns for the bond market, so rates held steady.

On Tuesday, April housing starts, a measure of new residential home construction activity, were 523,000 annualized. This is a weak, down 11% from prior month, number caused by a massive foreclosure inventory backlog so, again, bonds and rates held steady.

Yesterday, there was no material economic data but technicals played a major role in mortgages selling as they retreated off of the 200-day moving average after a couple unsuccessful attempts to break above it since May 5.

Today was mixed for bonds, and they ended about even (FNMA 30yr 4% coupon +3 basis points) after yesterday’s big selloff that pushed rates up about .125%.

-Weekly jobless claims declined 29,000 to 409,000 which was better than expectations of 420,000. (worse for rates)

-April existing home sales were down 0.8%, confirming continued housing weakness. (better for rates)

-The Fed’s Philadelphia regional manufacturing index showing the weakest activity since October, declining to 3.9 from 18.5 last month. (better for rates)

-But the inflation component of the Philly Fed survey also showed that considerable price pressures remain. (worse for rates)

Bottom Line: Rates remain within close range of 2011 lows and a near-term spike seems unlikely. Stay tuned