Mortgage Market in Review from Monte Hill week of 7/23/2007
Mortgage Market in Review
Week of July 23, 2007 Volume 14, Issue
Market Comment
Mortgage bond prices traded within a relatively narrow range leaving mortgage interest rates neutral to slightly better. Stock strength continued and global inflationary signs pressured bonds. However, the Fed minutes from the last meeting indicated an expectation for inflation to “edge lower” over the next two years which bodes well for bonds. For the week, interest rates on government and conventional loans were near unchanged to better by 1/8 of a discount point.
The gross domestic product data Friday will be the most important event this week. Fed “Beige Book”, durable goods orders, new home sales, and consumer sentiment data will also be important.
Looking Ahead |
Economic Indicator | Release Date and Time | Consensus Estimate | Analysis |
Existing Home Sales | Wednesday, July 25,
10:00 am, et | Down 1.5% | Low importance. An indication of mortgage credit demand. A significant decrease may lead to lower rates. |
Fed “Beige Book” | Wednesday, July 25,
2:00 pm, et | None | Important. This Fed report details current economic conditions across the US. Signs of weakness may lead to lower rates. |
Durable Goods Orders | Thursday, July 26,
8:30 am, et | Up 1.7% | Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates. |
New Home Sales | Thursday, July 26,
10:00 am, et | Down 1.6% | Important. An indication of economic strength and credit demand. A larger decrease may lead to lower rates. |
Advance Q2 GDP | Friday, July 27,
8:30 am, et | Up 3.2% | Very important. The aggregate measure of US economic production. Weakness may lead to lower rates. |
U of Michigan Consumer Sentiment | Friday, July 27,
10:00 am, et | 91.5 | Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates. |
Treasuries
The 10 and 30-year Treasury bond yields are often viewed as “benchmarks”, reflecting the overall state of interest rates in the US economy. Many people concerned about mortgage interest rates track these bonds as a barometer for mortgage interest rates. However, in reality the Treasury and mortgage markets trade independently.
The supply and demand characteristics of Treasury bonds and mortgage-backed securities (MBSs) differ significantly. Treasury securities represent money needed to fund the operations of the US government. MBSs, on the other hand, represent borrowing by homeowners. Demand for mortgage credit is seasonal and is also affected by the state of the overall economy. In terms of demand, Treasury securities are regarded as “risk free” investments, and often benefit from a “flight to quality” in times of financial crisis. Treasury bill, note and bond prices are dictated by yield requirements and inflationary concerns. MBSs, while not backed by the US Treasury, benefit from guarantees by “quasi-governmental” agencies, such as Ginnie Mae, Fannie Mae and Freddie Mac. However, because homeowners can sell or refinance their homes, investors in 30-year mortgage-backed securities usually see principal repayment in significantly shorter periods of time.
In the absence of information directly related to the mortgage interest rate markets, Treasury information can be useful. However, mortgage interest rates can vary significantly. In fact, many times the Treasuries will trade wildly while MBSs only see minor price changes and vice versa. Thus, differences between Treasuries and MBSs sometimes lead to misleading price change differentials.
Monte J. Hill
John Adams Mortgage
586-308-6420
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