Mortgage Rates

Anthony Hood
Equity Investment Capital
Office: 949-891-0067
Email: tony@equityinvestmentcapital.com
website: www.equityinvestmentcapital.com




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Wednesday, December 29, 2010

There was no driving news overnight and there is no economic data today; the only thing of importance is the last of the three auctions at 1:00, $29B of 7 yr notes. Yesterday rate markets were slammed hard when the results of the 5 yr auction were released at 1:00, the demand was very weak with the rate up more than 4 basis points from where the WI trading was yesterday morning, and the very wide bidding range of 4.6 basis points. Doing auctions the last week of the year is always a problem with most large potential bidders done for the year. Recent Treasury auctions have been more touchy with investors of all types wanting more yield to continue to fund the US increasing budget deficits. The farther out the curve the more yield is required, today's 7 yr may be set up well however, given the spike up n rates yesterday. Although we may see a better auction, in the meantime there won't be any significant buying of treasuries (and mortgages) until the auction results are known at 1:00 pm.

The last two weeks of each year are walks on the wild side; always difficult to properly assess price action with volumes very thin that most times exaggerate movement. The big declines in prices for mortgages and treasuries yesterday were in my opinion reflective of a lack of volume-----or was it? That question won't be satisfactorily resolved until next week when we get back to business. That said, the underlying outlook remains bearish for interest rates with the consensus outlook for 2011 being a stronger economic growth year. Even though our 2011 outlook is not as glowing as most believe, as long as that is the so-called consensus interest rates will continue to find it an uphill climb for lower rates. China raised rates for the second time in three months, GDP growth is expected at 3.5% to 4.0% in 2011, the Fed is desirous of a higher inflation rate, and after strong Christmas spending by consumers many believe the consumer is back. Our take; the consumer isn't back, consumer spending will not meet current expectations, the housing sector will continue to be very soft through 2011 with more foreclosures.

With the strong belief that the US will improve in 2011 inflation fears will continue to push rates up until evidence changes. Inflation in Germany, Europe’s largest economy, unexpectedly accelerated in December as prices surged in the final month of the year. The inflation rate increased to 1.9% from 1.6% in November. That’s the highest since October 2008. Economists expected an unchanged reading. Consumer prices jumped 1.2%, the biggest monthly gain since December 2002.