Rates increase tomorrow

Monday, November 05, 2007

ECONOMIC DATA / NEWS

Citigroup’s CEO was the latest person to lose his job as a result of mortgage market losses.  Technically, Charles Prince “resigned,” but that’s the way CEO’s are fired while being allowed to keep their dignity.  He has received a lot of criticism for allowing the company to become overexposed in the credit markets.  Citi announced that they may take as much as another $11 billion loss this quarter, on top of the $6.5 billion in write downs they already took in the third quarter.  That is hurting banking and investment firms’ stocks this morning, and MBS prices are down slightly as well.  However, Treasuries are gaining because they are being used as a hedge against losses in all the other securities.  This is one of those unusual instances where we could get a divergence between Treasury bonds and mortgage bonds, and it is the mortgage bonds that are going to provide us with direction for mortgage rates.

The services sector, which makes up over two-thirds of economic activity, grew quicker in October than economists had forecast.  The ISM index was expected to decline.  Instead, it rose one point to 55.8, which is consistent with modest economic growth.

TECHNICAL ANALYSIS

The problems that continue to circulate through the financial sector are going to make their market on mortgage-backed securities.  The FNMA 30-year 6.0% is down 9bp at 100.84.  Prices peaked at the strong resistance level at 101.06 last Friday, and they were promptly turned away.  Our primary support level remains at 100.62, so there is the danger that prices could fall at least another 22bp in the short-term.

Conversely the 10-year Treasury yield has been wavering between 4.30% and 4.31%, but the bond has yet to threaten any losses today.  The yield hit a new one year low at 4.27% in very early trading.  There is no real resistance before 4.40%.  There is only minimal support at 4.30%, and there are no major support levels before the three year low of 3.80%.  We have been saying for about a year that the 10-year yield was going to fall to the high to mid 3.0% range, and we are still expecting that over the next six to nine months.

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