Rates are going up

Wednesday, September 12, 2007

ECONOMIC DATA / NEWS

It’s amazing what speculation can do to the price of any investments.  Oil prices have been on the rise, and they hit a new record high of $78.99 per barrel this morning.  It’s all due to concerns that oil supplies could run short when we hit the cold winter months, which are a good four months away.  But, with the financial markets, there is often a shoot first and ask questions later kind of mentality.  Gas prices are climbing again, but are still well below their early summer peak.  Oil prices have not proved to be detrimental to core inflation over the past two years, but they certainly pose a threat to overall economic activity.  This could be one more catalyst that ultimately pushes the U.S. economy into a recession.

And speaking of speculation, there is much debate over what the FOMC will do with the overnight lending rate next Tuesday.  Some extremists would even argue that a rate hike is actually the best move.  However, the majority of the market believes a rate cut is a certainty, although the amount of that cut is very much in question.  We are expecting a .50% cut to match the cut in the discount rate.  It would send a strong message that the Fed will do what it takes to fight the housing market woes and stave off a recession.  The recession is still likely to come, but the Fed does have the ability to lessen the extent of it.

Some non-conforming rates were off by much more than conforming rates yesterday.  The reason is that investment rating companies like Fitch and Moody’s have been downgrading the ratings of the securitized MBS for many non-conforming loans.  This has three major effects.  A)  It makes it more difficult to find investors, which are already sparse to begin with.  B)  Those investors who are willing to buy these securities expect a greater return for the increased risk, thereby pushing prices lower and rates higher.  C)  And finally, most lenders have been forced to portfolio the majority of their non-conforming loans, so they expect a greater return for their increased risk and lack of liquidity.

TECHNICAL ANALYSIS

The FNMA 30-year 6.0% is down 6bp despite an attempted rally at the opening of the market.  Prices could easily drop to the 10-day moving average, and possibly as far as the 200-day moving average, which is 37bp lower right now.  We can loosely classify the previous three days’ candlesticks as an evening star formation, which signifies a shift toward downward momentum.  After rising roughly 250bp in about two months, prices are due for a little retracement.  We do expect the rally to resume next week though following the Fed rate decision, assuming they do cut by .50%.

The 10-year Treasury yield is barely back above 4.40%.  It is making its way back toward the top of the downward trend channel, which is also close to the previous support turned resistance at 4.45%.  However, both these levels should be considered weak resistance levels right now, because they have collided with the 10-day moving average, which prices have been below for a month now.  This means prices are way overdue to rise above this line, so the losses in Treasuries could continue over the next week or two.

Read more articles on our Mortgage News page, or view our entire Mortgage News Archive.

Mortgage News & More Info

Modesto mortgage news feed provided by Winchester Lending Group