Jumbo rates lower?

Wednesday, August 29, 2007

ECONOMIC DATA / NEWS

There is no economic scheduled for release today, so the markets are moving primarily on technical factors.  But, we are going to look at the minutes from the last FOMC rate decision meeting, which were made public yesterday afternoon.

First of all, the Fed members kept inflation as their primary concern, stating that although it appeared to be easing over the last few months, there are still economic factors that threaten to push it higher.  They mentioned the high use of resources, including labor, as a potential spark for inflation.  However, as we’ve seen, resource utilization has been high for more than a year now, and there has been no major effect on core inflation.

They did mention the effects of the housing market and credit conditions, which they (Bernanke in particular) have been saying appeared to be contained and would not spill over into other sectors of the economy.  At this last meeting, they were already starting to change their tune.  For those of you who have mentioned this in recent weeks, the Fed minutes state, “…some evidence points to diminishing availability of jumbo mortgages.”  Later in the discussion it came up that, “Participants agreed that the housing sector was apt to remain a drag on growth for some time and represented a significant downside risk to the economic outlook.”  Finally, they’re acknowledging that the housing market could have repercussions on other facets of the economy.  Keep in mind that this is their opinion about a potential future.  Fortunately, now that they’re acknowledging the problem (and since then have begun acting to correct it), they can do something to stop the market from falling too hard.

Based on their sentiment from their sentiment at the meeting three weeks ago, and their reaction to the new issues that have arisen since then, it seems to be almost a certainty that they will cut the Fed Funds rate three weeks from now.  As the economy slows and they begin to make it possible for banks to make credit more available, we should definitely see conforming rates improve more than they already have.  Plus, as mortgage-backed securities and Treasuries rise in price and begin to offer lower returns, investors will turn to non-conforming mortgage-backed securities for the higher yields.  As that happens, non-conforming rates should begin to fall gradually.  So, look for those jumbo and subprime rates to begin slowly improving within a month or two.  However, in the short-term they are likely to stay stable or possibly even rise a bit more.

TECHNICAL ANALYSIS

As we expected, MBS prices have hit a temporary peak.  Although they were able to break the 200-day moving average before closing yesterday, the FNMA 30-year 6.0% is now down 6bp and sitting right on this MA at 100.16.  It also brings the price back to touching the short-term upward trend line.  Generally, sharp trends like this do not last more than a couple weeks, so look for prices to slip below over the next few days.  Overbought conditions are adding pressure to prices as well, and the stochastics are right on the verge of crossing downward.  We probably won’t see prices fall all the way to the next support at 99.59, but they could drop another 16 to 25bp before heading upward again.

The 10-year Treasury yield has dipped as low as 4.50%, but since the yield has struggle to push any lower than that, it has popped back up to 4.52%.  It also bounced off the bottom of the current trend channel, but we still expect it to be at 4.45% or lower within the next two weeks

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