Markets don’t wait until the last minute, since they are usually driven by fear and greed. Yesterday’s Fed announcement, although it was nothing new and left overnight rates unchanged, caused an immediate improvement in stocks and bonds. In mortgages, with originators selling and the Fed, hedge funds, Asian investors, and money managers buying, rates improved and caused several investors to improve prices. One interesting thing to note is that Ginnie Mae securities, made mostly up of FHA and VA loans, are seeing continued interest from domestic and overseas banks for their reinvestment money (from buy backs) adding support to those prices.  

The FOMC’s statement didn’t surprise anyone. Since markets don’t like surprises, and there were none, things improved. “Economic activity has continued to strengthen and the labor market is stabilizing…Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit…investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability…inflation is likely to be subdued for some time.”  

In the mortgage markets, as expected, “To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability. In light of improved functioning of financial markets, the Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral.”  

Some mortgage security traders believe that we will all be better off with the Fed out of the MBS business, and that overseas investors and banks are expected to be key new buyers of Agency MBS, thus providing confidence to other investor groups to follow suit. A growing trade deficit and persistently steep yield curve may lead overseas investors and banks to increase MBS holdings. In a related issue, “foreclosure to REO transition rates” rose modestly this month across all sectors after falling for two years or more in most cases, as the foreclosure process has been stalled. REO pipelines have grown mildly lately after shrinking in 2009. As homes get pushed through loan modification evaluation, look for a change. Any increase in home prices would be positive, and as most folks in the business know lower priced homes have been performing better than higher ones, a partial cause for the slight improvement in subprime default rates.  

In fact, many analysts believe that the entire yield curve, short term rates relative to long term rates, to do very little in the next three months. Of course, crystal balls don’t work so well farther out, and in the 6-and 12-month horizons most believe that yields will begin to rise sharply. Not only because the economy is beginning to heat up, but we will have the Fed’s balance sheet contracting quite a bit over the coming 12 month horizon on a combination of pay downs, redemptions, and buyouts.  

For this morning’s market, ahead of the Producer Price Index, rates were down and stock market futures were pointing to yet another improvement. The February PPI was -.6%, mostly due to energy costs; ex-food and energy the core rate was +.1% (as expected). The year-over-year numbers were also satisfactory, and overall it does appear that inflation is not a big deal. After the numbers we find the yield on the 10-yr at 3.63% and both 5-yr Treasury and mortgage prices a shade worse.  

Lastly, this morning’s report from the Mortgage Bankers Association of America (MBAA) showed that its application Index rose last week by .5%. It is nice to see that purchases outpaced refinances +5.7% versus -1.5%.