June 24, 2012

WeeklyBasis: Low Rate Complacency

June 24, 2012

WeeklyBasis: Low Rate Complacency

Rates ended last week up .125%, rising slightly off record lows: 30yr single family home loans to $417k closed at 3.625%. Here are rates for all loan tiers.

Rates for loans to $417k and $625k set new record lows to begin June and have been at that level or .125% higher all month. As for jumbo loans above $625k, they’re not subject to every whim of MBS trading because jumbos aren’t being securitized (in any reliable manner).

The low was 3.5% with zero points (but still a full set of closing costs) on a 30yr fixed single family home loan to $417k. Rates closed Friday June 22 .125% higher than that after last week’s Fed meeting disappointed mortgage bond (MBS) investors by not providing any explicit message about further Fed buying of MBS.

For now it’s status quo on Fed MBS buying announced September 21, but status quo is still a huge boon for rate consumers. Here’s a quick recap:

The Fed is a massive MBS holder—they bought $1.25 trillion of MBS from January 2009 through March 2010 to help lower rates and support housing during the worst of the crisis fallout—so they collect principal balances as loans refinance, and they also get paid as homeowners make their mortgage payments. Last September, the Fed said they’d use the money they collect from these loan payoffs and payments to buy more mortgage bonds. Previously this money was being used to buy Treasury securities.

Rates drop (or stay low) when bond prices rise on this kind of buying.

There was some speculation going into last week’s Fed meeting that the Fed might also target MBS buys as part of Operation Twist, which is another current Fed asset purchase program. In Operation Twist, the Fed sells Treasury debt with durations of 3 years or less and reinvests the proceeds into durations of six to 30 years. This helps lower rates on various forms of credit, since many rates are tied to longer-dated Treasury yields.

The speculation was that instead of reinvesting proceeds from short-term Treasury sales into longer-dated Treasuries, the Fed might reinvest into MBS. It didn’t happen. Instead the Fed said they’d extend Operation Twist—in its current form—from the originally scheduled June 30 end date to the end of 2012.

That caused MBS to sell and rates to rise .125% by the end of the week.

Looking at next week’s economic calendar, the notable U.S. economic data includes May New Home Sales Monday, April Case Shiller Home Prices Tuesday, May Pending Home Sales Wednesday, 1Q GDP Thursday, and Consumer Income/Spending/Inflation Friday.

The housing data is of course important to set the broad economic tone, but the GDP number is more of a rate market mover. This is the third of three 1Q2012 GDP figures, and the first one was already revised down from 2.2% to 1.9%. If it’s revised down further, MBS could rally more.

As for the technicals, the 3.5% Fannie Mae MBS coupon lenders use as a benchmark for rates broke below the 10-day average Friday, but is still 10 basis points and 56 basis points above 25-day and 50-day moving averages respectively. This should provide support to start the week and keep rates steady.

Europe will dominate next week’s trading yet again. There’s a European Summit June 28-29 to lay out euro-saving policies. And key countries’ leaders are meeting beforehand as well to debate the Growth vs. Austerity solutions for the Eurozone.

Can’t rely on politicians for clarity on such complex topics so uncertainty is likely to reign, which again, means rates should remain steady as MBS continue to be a safe haven trade.

I’d just conclude that “steady” is in a weekly context and you can’t be lulled into low rate complacency. MBS are volatile amidst this kind of uncertainty and rates do rise .125% to .375% on given “Europe-is-getting-better” days then slowly tick back down—that’s gut wrenching if you miss your window. So if you’re a rate consumer, you need to work with your lender to identify a rate target with pre-authorization to lock that target. Because if rates start rising, your lender needs to react in minutes, not hours or days.

Stay tuned: Twitter | Stocktwits | Facebook