Market Update – March 19, 2010

Let’s talk about the government buying mortgages. Last week the Fed purchased $10 billion net in agency MBS’s, hitting the $1.236 trillion mark. Fannie Mae released more details of the delinquent loans it will be purchasing out of pools. Almost all 6.5% and higher coupon delinquent loans will be bought out in March. Almost all 6.0% coupon buyouts will happen in April, leaving 5.0% & 5.5% in May and June. Fannie said that lower coupons can be bought out ahead of this monthly schedule if they’re 24 months delinquent or ready for permanent modification under loss mitigation (per FNMA) FNMA has announced that it will repurchase 220,000 loans in the April report.

With no news today, aside from many folks watching the results of the NCAA basketball tournament, the trading today may match yesterday’s (and much of the week’s): spreads steady, moderate selling from originators (e.g., moderate locks), buying from the Fed, money managers, hedge funds, servicers. There is some movement of positions from April out to May in order to avoid some volatility due to the Fannie & Freddie buyouts and the end of the Fed purchase plan on the 31st. Some traders believe that volatility will increase substantially when the Fed exits the market as the street’s appetite for risk remains very low.

As opposed to today, which has no scheduled economic news, yesterday we had quite a bit. I had already mentioned the inflation numbers and initial claims. Later in the morning we also saw the Conference Board’s Leading Economic Indicators increase for the 11th straight month – impressive, and consistent with the belief that the economy has bottomed out and is slowly strengthening. The “Philly Fed” came out slightly stronger than expected, which also helped the equity markets but to the detriment of bonds. In fact, stocks have improved for 8 straight days.

The yield curve, which has been steepening, recently has gone the other way. In fact, the slope of the curve, measuring the difference between risk-free Treasury 2-yr notes and 30-yr bonds, fell to the narrowest level in two months. At the short end, futures show a 38% chance that the FOMC will increase the Fed Funds’ target by at least a quarter-percentage point by the September meeting, compared with 49% odds a month ago. With no news today, we find the yield on the 10-yr. Treasury note sitting around 3.69% and mortgage prices worse between .125 and .250 depending on coupon.

On today’s date: March 19…

1991: Sacramento Kings set NBA record of 29 consecutive road loses    

1942: Franklin D. Roosevelt orders men between 45 and 64 to register for non military duty        

1931: Nevada legalizes gambling                

1918: Congress authorizes time zones and approves daylight saving time   

1895: Los Angeles Railway established to provide streetcar service