Mortgage Market Update

Forwarded exclusively by:	Anthony Hood Equity Investment Capital Office: 949-891-0067 Email: tony@equityinvestmentcapital.com website: www.equityinvestmentcapital.com
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Thursday, November 04, 2010
Markets opened substantially better this morning after a very volatile trade yesterday afternoon on the FOMC statement and the details on what the Fed will do on the QE. $600B of additional treasury purchases and $250B to $300B more from the pay down of principle from the $1.25T of MBSs bought over the past 18 months (ended last March) over the next six to eight months. The long end of the yield curve crumbled, the 30 yr bond yield increased 12 basis points in rate to 4.06%, the 10 yr yield by the end of the session was down 1 basis point in rate to 2.58%, the 5 yr note yield declined 5 basis points to 1.11%. Mortgages took an initial hit but rebounded by the end of the session to close better in price by .15 bp), but still slightly weaker than at 9:30 yesterday. The DJIA opened at 9:30 +80 points, the 1`0 yr note +21/32 at 2.50% and mortgage prices +17/32 (.53 bp). The Fed's easing is steepening the yield curve, rates lower at the short end and higher at the long end of the curve. This morning the rate markets are improving and settling down somewhat from the initial confusion yesterday on how the easing may impact interest rates. At 9:30 the 10- yr note price up 23/32, its yield 2.50% -8 basis points, mortgage prices at 9:30 +18/32 (.56 bp) on 30s. +18/32 (.56 bp) on 30 yr FHAs and +12/32 (.37 bp) on 15s. The Fed will likely buy treasuries at the belly of the curve, 5 yr and 7 yr notes. The plan apparently, drive down short term rates to motivate borrowing by businesses that hopefully then will start hiring. At 8:30 this morning weekly jobless claims were higher than forecasts, up 20K back over 450K to 457K, continuing claims did decline to 4.34 mil from 4.382 mil last week. The 4 wk average for claims at 456K. The increase in claims provided a boost for the rate markets. Also at 8:30 Q3 productivity expected up 0.9% was up 1.9% after falling 1.8% in Q2. Unit labor costs down 0.1% after increasing 1.3% in Q2. The opinions about the Fed's easing are all over the map. There are many that believe the easing is a mistake and won't help much to increase the speed of the recovery; while many others fear that the Fed may be successful in increasing the inflation rate as the Fed has said it wants for many months now. While the Fed won't make a point of it, they want the dollar to weaken, and that is happening. A weaker dollar is inflationary, not what investors want at the long end of the curve----the 30 yr bond got ripped apart yesterday and is weaker again this morning. The Fed's plan is to drive investors out of the safe treasury market and into equities and higher yielding bonds such as MBSs and high grade corporates. Attempting to force investors away from safety and into other investments that provide better returns is supposed to change the economic outlook to more optimistic. Expect markets to remain edgy through today and into the employment report tomorrow. So far so good after the volatility yesterday, the 10 yr and mortgages are improving; however traders remain unsure about what the actual impact will be for mortgage rates and the key 10 yr note.
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