Strong Auction Helps Mortgage Rates

Mortgage backed securities opened lower yesterday forcing lenders to increase consumer borrowing costs from the prior day. The trading action was rather boring with MBS move sideways in an extremely tight range until 1pm. At that time, the Department of Treasury released the results of the 10 year treasury auction which drew very strong demand. As a result, MBS started to rally and lenders reissued rate sheets lowering consumer borrowing costs.

The data picks up today with 3 releases all at 8:30am.

The Department of Labor released the weekly jobless claims. This report tracks the number of Americans that filed for first time unemployment benefits in the prior week. Since our economy is driven by consumer spending, higher jobless claims indicates consumers will have less money to spend which is bad for corporate profits and stocks but generally helpful in keeping interest rates low. Recent reports have shown a steady decline in jobless claims which indicates a improving jobs sector.

This report gives us three measures of unemployment claims:

- Initial Jobless Claims: totals the number of Americans who filed for first time unemployment benefits in the previous week
- Continued Claims: totals the number of Americans who continue to file for benefits due to an inability to find a new job
- Extended and Emergency Benefits: totals the number of Americans who have exhausted their traditional benefits and are now collecting extended and emergency benefits which can last as long as 99 weeks

Here are the results:

- Initial Jobless Claims: +35,000 to 445,000 vs estimates of 409,000. Prior week was revised worse to show an additional 1,000 claims. Weekly claims are quite volatile so market participants track the 4 week moving average which rose 5,500 to 416,500.
- Continued Claims: -248,000 to 3.879million vs estimates of 4.095million.
- Extended and Emergency Benefits: +128,000 to 4.64million

This is the second week in a row of rising claims with the weekly claims being the highest since October 30. On the other hand, continued claims fell to their lowest level since October 2008.

We also received our first look into inflation data with the release of the Producer Price Index. The PPI measures the monthly change in prices paid by manufactures and wholesalers for the goods they consume to produce their product. If businesses are paying more for the materials they use to produce their widgets, they may be forced to pass along those additional costs to the consumer. During periods of economic stagnation, when unemployment is high, producers find it difficult to pass higher costs along to the consumer because demand is already below average. This report gives us two measure on inflation… the overall read and the core read. The core rate strips out food and energy due to their monthly volatility.

The overall PPI posted a month over month gain of 1.1%, the most in 11 months vs expectations of 0.9%. Year over year, overall producer prices fell from 4.3% last month to 4.0% . The core rate came in on the screws with a month over month increase of 0.2%. Year over year, core prices posted a gain of 1.3%. Core inflation remains very tame but the headline numbers to offer some concern. The rise in overall PPI is being led by food prices which gained 0.8% and oil which surged 3.7% in December.

Our final report comes from The Department of Commerce with the release of the International Trade report. Trade balance data reports the difference between the monetary value of a country's exports and imports. A positive balance, or trade surplus, means exports exceed imports and illustrates that a country's economy is globally competitive. A negative balance of trade is known as a trade deficit or trade gap. The US currently runs a trade deficit. This report in general does not have a huge impact on the bond market.

This report has a two month lag, so today’s data covered November’s Trade Balance. The report indicated our trade deficit narrowed slighty from a revised $38.42 billion in October to $38.31 billion in October, better than the expectations of a trade deficit of $40.50 billion and the narrowest gap in 10 months. Imports rose 0.6% and exports rose 0.8%.

At 1pm we will get the results of the week’s final debt offering. The Department of Treasury will be auctioning $13billion of 30 year bonds. Tuesday’s 3 year note auction didn’t go so well, but yesterday’s 10 year note auction saw very strong demand. I suspect today’s auction will also be met with decent enough demand to allow MBS to at least hold onto the gains of the past day. If demand is better, we could see revised rate sheets for the better later this afternoon.

Lender rate sheets are similar to those after the reprices yesterday. The par 30 year conventional rate mortgage remains in the 4.75% to 5.00% range for well qualified consumers. There are a few lenders that are offering 4.625%. As always, to secure a par interest rate on a conventional mortgage you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including an estimated one point loan origination/discount/broker fee. The par FHA/VA rate is in the 4.50 to 4.75% range with lower FICO score requirements but higher closing costs and monthly mortgage insurance which offsets the lower mortgage rate.

I feel floating for today is the way to go. Today’s final auction should go well and very good chance that we see improving MBS prices after the results are released. We do get some high impacting reports tomorrow with Consumer Price Index and Retail Sales being in the spotlight. If it reports higher than expected inflation or higher than expected sales, rates will come under pressure tomorrow.