San Diego Home Mortgage Blog

Today so far is the first day in the last four that has treasury prices trading higher, mortgages are following as usual. We suggest floating to begin the day but unless mortgage prices advance from morning levels enough to lessen risk of holding overnight we will lock and not float overnight. Still bullish on rates for the near term but at the present low rate levels we cannot discount a correction of some magnitude.

Treasuries and mortgages opened better this morning after the 10 yr note tested and held its support at 3.26%/3.28% yesterday. At 8:30 the 10 yr +7/32, mortgages +4/32; the DJIA futures traded -2 points. At 9:00 the 10 yr +10/32 at 3.22% -4 Bp, mortgage prices +7/32 and the DJIA -10. At 9:30 the DJIA opened -25, 10 yr +12/32 3.21% -5 BP and mortgages +4/32.

At 7:00 this morning the weekly MBA mortgage applications index increased 16.4%; the purchase index +13.2% and the re-finance index + 18.2 from the previous week. The third consecutive week where the 30-year fixed mortgage rate was below 5.0%, and is at its highest level since mid-May for the re-finance market. The refinance share of mortgage activity increased to 66.3% of total applications from 65.3% the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 6.1% from 6.2% of total applications from the previous week.  The average contract interest rate for 15-year fixed-rate mortgages decreased to 4.32% from 4.34%, with points increasing to 1.04 from 1.01 (including the origination fee) for 80% LTV loans. This is the lowest 15-year fixed-rate ever recorded in the survey.

Fixed rate MBS production totaled $117B for September, down $24B (17%) month over month. 30 yr production decreased by $18B (15%) from August in large part due to seasonality.

At 2:00 this afternoon treasury will report the budget deficit for Sept and the fiscal 2009 deficit total; expected to total $1.6T for the year.

The only other economic measurement comes at 3:00 this afternoon with August consumer credit, expected to have declined $8.5B after plunging $21.6B in July. Consumer spending is down but not a problem for the economic outlook or the equity markets; markets are discounting the consumer and betting on a consumer less rebound based on business growth and increased profits that were achieved by slashing employees and expenses.

At 1:00 Treasury will sell $20B of 10 yr notes, re-opening the 10 yr note issued in August. No problem for the auction as markets are totally convinced the demand for treasuries, even at these low rates, will continue strong as all auctions have been for the past three months.

Demand for longer dated maturities (10 yr and 30 yr) is being pushed somewhat by mortgage holders buying treasuries to protect against shortened maturities in mortgage duration as rates fall and re-financing increases. Feeding on itself, as rates fall more buyers step up to push rates down further. Inflation fears are almost non-existent in the outlook through most of 2010, also helping drive rates lower. That said, that appears to be contrary to what we are seeing in the gold market with gold making new historical highs. Gold bugs don't believe that inflation is dead, also we believe gold buyers are not convinced the US economy is free from a double dip recession. Then there is the collapsing dollar that is inflating gold prices; as the buck declines the value of gold in dollar terms increases. Gold prices however; when inflation is applied is still less than what it was in 1982 when it hit $800.00.

The majority of thinking this morning will be on the 10 yr auction at 1:00 and the performance in stock markets. The supply issue continues to weigh, but there is cautious faith that the market will be able to swallow the next two, longer dated offerings. Today's 10-yr will be followed-up by the $12B 30 yr tomorrow; the bigger test of bonds resilience, suffering from duration, low rates and the, generally, less popular reopened status.

PRICES @ 10:00 AM

10 yr note: 103.14 +12/32 3.22% -4 BP

5 yr note: 100.26 +6/32 2.20% -4 BP

2 Yr note: 100.07 +1/32 0.88% -2 BP

30 yr bond: 108.05 +23/32 4.03% -4 BP

Libor Rates: 1 mo; 0.244%; 3 mo 0.284%; 6 mo 0.600%; 1 yr 1.216%

30 yr FNMA 4.5 Nov: @9:30 101.12 +4/32 (+1/32 frm 9:30 yesterday)

15 yr FNMA 4.0 Nov: @9:30 101.26 +2/32 (+2/32 frm 9:30 yesterday)

30 yr GNMA 4.5 Nov: @9:30 101.17 +2/32 (+1/32 frm 9:30 yesterday)

15 yr GNMA 4.0 Nov: @9:30 102.17 +3/32 (+2/32 frm 9:30 yesterday)

Dollar/Yen: 89.18 +0.42 yen

Dollar/Euro: $1.4663 -$0.0059 (dollar better)

Gold Dec: $1,041.10 +$1.40

Crude Oil Nov: $71.01 +$0.13

Goldman-Sachs

Commodity Index: 465.33 +2.27

DJIA: 9700.19 -31.06

NASDAQ: 2100.74 -3.10

S&P 500: 1053.17 -1.55