Market Comment - Week of January 4th, 2010
January 4th, 2010 11:55 AM

Mortgage bond prices fell last week pushing mortgage interest rates higher. The bond market was choppy most of the week as thin trading conditions magnified movements. We started the week with rates heading higher Monday. Fortunately there was a bit of a rally Tuesday and Wednesday as the Treasury auctions were decent. Those gains were short-lived as the weekly jobless claims figure wasn't as bad as expected. The bond market closed early Thursday and was closed the entire day Friday. For the week interest rates rose by about 1/4 of a discount point.

ISM Index data will set the tone for trading this week. The employment report will be the most important release but it doesn't arrive until Friday. This will be the first full week of trading this year. It will be interesting to see how traders react to the recent spike in rates following the various shortened trading sessions.

Economic Factors
Economic Indicator
Release Date Time
Consensus Estimate
Construction Spending
Monday, Jan. 4, 2010
Down 0.5%
Low importance. An indication of economic strength. Weakness may lead to lower rates.
ISM Index
Monday, Jan. 4, 2010
Important. A measure of manufacturer sentiment. Weakness may lead to lower mortgage rates.
Factory Orders
Tuesday, Jan. 5, 2010
Up 0.5%
Important. A measure of manufacturing sector strength. Weakness may lead to lower rates.
ADP Employment
Wednesday, Jan. 6, 2010
Important. A measure of employment. A larger than expected decrease in jobs may bring lower rates.
Friday, Jan. 8, 2010
Unemp. @ 10%, Payrolls unchanged
Very important. An increase in unemployment or a large decrease in payrolls may bring lower rates.

The Year Ahead

This year begins in a similar fashion to last year. Last year at this time 30 year fixed rate mortgage interest rates were historically low. Most pundits predicted little or no opportunities for additional refinancing. Mortgage interest rates did spike higher from time to time throughout the year but overall the Fed did an excellent job of keeping rates in check. Unfortunately now the Fed's $1.25 trillion mortgage backed securities (MBS) purchasing program is nearing the end and the future remains uncertain. The good news is that 30 year fixed rate mortgages remain low but once again future predictions are all over the board.

What will occur in the future, economic recovery or additional weakness will continue to be debated. There is no certainty in predictions. Data can be used to support both sides of the debate. What we can be certain of is the fact that until the economy gains some stability, mortgage interest rates are likely to be volatile. Historically, mortgage interest rates seem to improve slowly. In contrast, when rates increase, it is often fast and furious. One negative day often erases a week of positive improvements.

It is possible for mortgage interest rates to push lower considering the Fed still has a few hundred billion dollars of MBS purchasing left. However, we are in unprecedented times. The Fed has clearly signaled they want rates to remain low but also want to exit the market. The Fed isn't the only player in the mortgage bond market and there are many others buying and selling the securities. Remember that the Fed does not directly dictate that mortgage interest rates will be at a certain percentage. Rates are determined by the supply and demand for mortgage-backed securities.

The Fed kept rates in check for 2009. The big unknown is how they will exit the market without causing major disturbances this year. While there have been signs of improvement in the housing sector, the last thing we need is higher rates. Without the Fed buying mortgage bonds rates may very well head considerably higher. Now is a great time to take advantage of favorable rates.

Posted in:General
Posted by Philip Jernigan on January 4th, 2010 11:55 AMPost a Comment

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