San Diego Home Mortgage Blog

Fractionally better now in the mortgage market than when prices were set this morning.  We suggest continuing to hold any that were floated over the weekend but do not float more. The bond and mortgage markets are edging better but after the recent spike a week ago, technically negative for the near term. Be conservative, nothing very constructive at the moment. If you didn't float over the weekend, keep locked overnight.

The only market moving today was the equity market as it continues to advance. The bond and mortgage markets were as we expected today, quiet. Not much change today. No data to think about left the bond market contemplating the Fed's "official announcement this morning that it is testing procedures to do reverse repos to drain money from the banking system; not to worry, the Fed is only testing and in a way softening up the market if the next FOMC meeting it is discussed. Nevertheless, the Fed is taking a small step to set up procedures to take back a lot of that stimulus money tossed around like confetti in a New York parade. The move to do reverse repos didn't come as any surprise, markets were well aware that the Fed was working on a method to tighten without actually increasing the FF rate. Don't look for any repo action this year.

What is a reverse repo? To start, Repo is short for repurchase ; essentially the Fed sells securities to its 18 primary dealers for a specific period, generally short duration, temporarily decreasing the amount of money available in the banking system; at maturity of a reverse repo, the securities the Fed sold to the dealers are returned to the central bank, and the cash goes back to the companies. The plan being worked out is a tri-party reverse repo where a third party will act as a clearing house to handle the transactions and hold the securities the Fed sells to dealers. Simply stated the procedure drains money out of the banking system on a short term basis and generally has the affect of slightly increasing very short term rates. The long end; our end of the curve, isn't directly impacted but with the Fed's plans being formed it does have a positive influence as it demonstrates the Fed is not about to let inflation get a toe hold on the economic recovery.

This weekend's Barron's article is calling for the Fed to start increasing the FF rate now and not later. The article's main point, the FF rate does not need to be at zero to continue the economic recovery. Thankfully the Fed isn't likely to bite on that logic. Increasing the FF rate will increase rates across the curve, including mortgage rates which at this time is the last thing the Fed or anyone else should the doing. The recovery in the housing sector has a long way to go and is still the key that has not opened any doors for recovery. More to the reality; there is increasing pressure to extend the first time homebuyers tax credit, and to allow the tax credit to be used for closing costs. Extending the tax credit doesn't require an explanation on its benefits.

Bernanke in Santa Barbra this morning called on the exploding Asian economies to do more to stimulate their domestic growth and not relay totally on exports to grow. “Trade surpluses achieved through policies that artificially enhance incentives for domestic saving and the production of export goods distort the mix of domestic industries and the allocation of resources, resulting in an economy that is less able to meet the needs of its own citizens in the longer term.” He had nothing to say about Fed policy and US interest rates.

The old worn adage of where there is smoke.... don't be complacent; even though the Fed continues to state it has no intentions to increase interest rates other countries are closer to it. Australia raised its base rate last week by 25 basis points and most talk coming from G-20 countries is about increasing rates at some point. The US bond market will be way out in front of any actual Fed tightening and will discount any tightening months before we actually see it. US interest rates have likely bottomed at levels seen two weeks ago, the path now is higher although very slowly and in choppy moves. Of course, as always; if the economy backslides into a double dip recession rates will decline. The Fed is waiting patiently to see whether a double dip is out of the question before increasing rates; although the equity markets appear to be convinced its onward and upward, there are plenty long stocks that feel like they are sitting on a hot skillet however.

No end top the dollar's decline, lower again today. Not good, but it does help our export market. The Obama administration is the first in 12 years that has not talked up that it wants a strong dollar; by not doing so it is an open door to sell dollars based on the unstated view the administration wants the dollar to decline.

Tomorrow Sept housing starts and permits (+2.0% and +1.8% respectively). Sept PPI is also at 8:30 but not likely to shake markets; inflation is not an issue now (+0.1% overall and +0.1% for the core rate).