Commentary on today’s MBS market, written by Adam at the MDN:
We were forced to sit in on another slaughtering today. It didn’t start that way but by 5pm the 10 yr note had totally shed all gains, gone red, and broken two or three more support levels on its way up to 3.538%. The FNCL 4.0 MBS coupon actually revisited the 96 handle in after hours trading. April was the last time 4.0s saw the 96s. Lenders repriced for the worse.Lenders repriced for the worse again. The best execution 30-year fixed mortgage rate is now 5.00%
WTF?
Lots of explanations out there. Not much of a consensus on the actual cause of this mess though. Everybody seems to be grinding a different axe or taking another angle.
Onlookers attempt to rationalize but always end up wrapped in a web of conflicting conclusions. Me included. We have so much on our plate. How could anyone make sense of it all?
Tax cut extensions. QEII. Inflation. Deflation. Reflation. Disinflation. Weak dollars. Strong exports. More Jobs. Strong dollars. Weak exports.Fewer Jobs. Investments in productivity. Faster factories. Fewer Jobs! Super high savings rate. Seasonal spending sprees. Temporary hiring? Long term unemployed!?Lazy labor force. Lower wage rate. Private payrolls growth. WAGE RATE GROWTH. Aggregate demand. Foreign investor demand. European states. State and local governments. Budget Deficits. Credit Ratings…………..currency crisis…..NORTH KOREA…IRAN….CHINA……2012. BOOM.
And I didn’t even mention housing or financial reform or the assorted entitlements that may or may not lead to the downfall of the greatest country in the world.
SEEMS LIKE IT MIGHT BE HARD TO WRITE AN ECONOMIC FORECAST WITH ALL THAT TO CONSIDER AT ONCE RIGHT?
And Then. To make matters worse. This is all being digested in a trading environment that is primed for price volatility. Allowing for an easy misinterpretation of the market’s exaggerated momentum which in the process has drawn more onlookers who are attempting to explain which leads to more ambiguity which takes us full circle on what I am calling the “UNCERTAINTY PREMIUM”. <—There it is. The root cause under the recent spike in rates. (SELL IN DECEMBER BUY IT BACK IN JANUARY?)
The market is really just glad to be getting out of 2010 with profits on the book and no FBI on its back. And unfortunately the buyers we need to get this sell off moving in the opposite direction are clearly sitting on their wallets….watching as fast$ day traders commoditize the benchmarks that dictate the directionality of our mortgage rates….which has sadly led to an incredulous amount of snowball selling (remember the relentless rise in oil prices during the summer of 2007? the current herding behavior of the TSY market is very similar)
All this nonsense certainly makes you wonder about the sudden shift in economic outlooks we keep hearing about though. Especially when you stop to consider that all economic outlooks are essentially incomplete because at least one of the underlying assumptions in every model is pushing the boundaries of “guesstimating”. Leaving much room for a wider margin of error. Or as the Federal Reserve puts it, “Participants continued to attach an unusually high degree of uncertainty to their projections”.
So Yeh. The “uncertainty premium”. And yes I think this sell off has been exaggerated. No I do not know when momentum will turn for the better. But if I had to venture a guess it would probably revolve around the release of the December Employment Situation Report on Friday January 7th, 2011.
More on rates from Diana and cnbc:
http://www.mortgagenewsdaily.com/channels/video/188954.aspx
Don’t have to know the “why” to know that it’s bad for housing prices.
Yes, all that uncertainty for Wall St investors and traders to deal with, poor babies, and don’t forget that they’re paid a pittance to manage all of this.
Give me a break.
From all the noise two facts emerge:
Many many extra dollars have been printed.
This MUST cause price inflation (more dollars chasing the same amount of goods and services) causing the price of hard assets (such as property) to inevitably rise.
The price/value of your owned (not rented)home in dollars will rise while remaining constant in swiss francs/german marks/sa rands, as an american home owner this should not affect you negativelyas your mortgage is denominated in the same inflated dollars.
My relatives in zimbabwe who invested in houses (not farms) are still relatively well off as these hard assets preserved their value.
The chickens are coming home to roost for Zimbabwe Ben’s money-printing.
Hope you got a fixed-rate mortgage and don’t EVER touch a 30-year Treasury!
I guess there are more sellers o treasuries than the fed anticipated.They will have to fire up the printing press and buy some more treasuries so the housing market can recover?
andrewa-Of course, we had actual deflation last year. I’ll believe all this inflation talk when I actually see it; so far, it hasn’t shown up in the real world.
I think Smiths “invisible hand” is giving a high five to the market right now which wants to go up despite all the fed funny money being thrown at it to keep rates low.
As someone who bought their first house in San Diego in 1982, 5% doesn’t sound too bad.
Try 15% on for size!!
Being a macro-view guy, I have become firmly in the camp that we are headed into a significant inflationary period. How severe will it be, who knows. Only that I expect it to be above average and somewhat painfully so.
I just firmly believe that the historical volumes of money pumped into the system can have no other effect in the mid/long term. You cannot fight the tide no matter what you do.
Secondly, preparing for it now, before it is obvious to everyone, at least with a portion of your IRA is the prudent thing to do. Just like the housing crash, waiting till 2009 got you in trouble. Seeing it and exiting in 2006 would have been wise given that we knew things were out of historical perspective.
Use the lessons just learned from the housing bubble about spotting macro problems/trends.
Inflation may not be here today, or even tomorrow, but when you see clouds forming on the horizon, you get an umbrella out. Even if you don’t actually end up needing it.
How about a simpler explanation? Lenders are raising their rates because they’re getting funds at massive discounts, they want bigger profits and there are no longer any usury laws so nobody is telling them they can’t charge more. It’s the banking equivalent of rich people getting massive tax cuts and not spending the extra money to stimulate the economy.
WTF is right Adam. Why does anyone listen to book-talking “experts” like you? Why are rates going up? Try common sense. THE MARKET IS BEING DRASTICALLY MANIPULATED, THAT CAN’T LAST VERY LONG.
Why would anyone want to own a 10yr note at 2.35%? Add in the fact that the Fed has basically been exposed as being idiots, out of control and having no more weapons (more on them being idiots and out of control when Ron Paul becomes their overlord shortly) and it makes perfect sense.
Spot on Grizzly – Rates went down when all the traders piled into the treasuries market knowing the fed would come in and buy all the tbill out there at ever higher and higher prices. It was a trade, not an investment.
These guys leveraged up, bought the tbills, flipped out to the Fed and cashed in. Now they are exiting the trade.
It will likely hit 4%, then the traders will jump back in knowing the Fed will hit the accelerator and bid it back up to get rates back down again.
Around and around they go…the trick is to get off the train before it derails. I’d rather be off that train a few stations before the track gets too short…trading/precision-timing has never been my strong suit.
Go to 3:30-min mark:
http://www.youtube.com/watch?v=03Nq632eV6I&feature=player_embedded
well played JTR…
Exactly right, Clear, it’s a Bernanke (King Fool) put trade… except this time the fed is still buying and the rates are still going up. It may just be that rates are finally going up in the mid to long ranges no matter what the fed does…
I have the same problem with timing, the markets are stupid at lot longer than makes sense.
Griz – my timing skills are what drove me into real estate investments vs. the stock/bond world. More of an oil-tanker vs. speed boat mentality. I like to ride the macro trends and do as best I can to tune out the daily noise (as fun as it is to quibble over the fringe details over drinks…).
I certainly find the numbers in real estate to be much more interesting but become concerned about all the “smart money” (read: investing with other peoples money) getting into the game and making prices too high with rates rising and much more decline to come. As always it takes hard work, discipline and some luck… I bet it helps to not need to do a ton of deals as well.
Was talking to another parent at a party the other day. Husband is a bond trader – only makes trades his boss approves, gets paid pretty darn well for adding that little value. On the side he’s starting to buy depressed properties to rent out. Figures he’ll be helping families who need a place to rent and then the ones who will be able to buy the place from him a few years from now when things settle down. In a sign I must finally be maturing, I said nothing. Sure was hard.
Clearfund,
The next 3 years you’ll make more money in stocks than in real estate, especially California.
With rates going up, expect the second leg down in real estate. It’s been only 3 years since the top.
Just a comment on inflation. Anyone who thinks there is not real, tangible inflation right now should check the prices of sugar, cotton, uranium, wheat, coffee, copper, silver, gold, corn, etc, etc
Pretty much every single actual hard commodity is up double digit percentages in 2010 and many are up > 30% at all time highs (except oil + natural gas).
http://www.indexmundi.com/commodities/
Bernanke probably has a non-asset backed piece of green paper to sell to anyone who believes the government’s inflation number (CPI) reflects what is actually happening in the real world.
My view is that rising rates will counter (housing price) inflation and keep house prices from increasing or decreasing much for a while.
Mds – agreed with you on the near term re stocks etc. We are looking to make our money by buying well over the next 3 years. Our style of property which has a 10 year investment horizon.
Thus we intend to stock up over time and patienty wait. To me 3 yrs is like a blink of an eye in real estate time..
My vote is that the rates are returning to a more normal level after being set at super low “the sky is falling rates” which no longer apply due to signs that the economy is recovering (slowly)such as higher spending and that unemployment is at least stable (as opposed to rapidly increasing).