There was a lot expected of this week and it turns out that the build-up was far more exciting than the results. As mentioned on Wednesday afternoon, the Fed announcement and subsequent press conference did very little to provide traders with any new insight into future Fed action.

One thing that the Fed did do was make it clear to not expect anything definitive from them. They are doing just what everyone else should be doing which is look to the economic data to determine the future of interest rates. However, the game here is to see what the Fed will be doing regarding their open market operations so traders can front run the Fed. That is what bond trading is about now-a-days as opposed to trading based upon fundamental or technical philosophies.

So where do we go from here? In my opinion not very far in either direction until the NFP number next Friday. We are currently sitting at a 1.95% on the 10yr and I give the range a +/- 8bps from here. Of course there could always be some headline news out of Europe that could rattle the cage but those headlines have been pretty quiet. When something has happened over there like the recent downgrade of Spain, it was met with little reaction. So all eyes will be on next week’s report to see if there is any follow-thru from the last poor report. If it is another weak number then I could see us having a nice rally that might not test the 1.71% low on the 10yr but I could see 1.80% pretty easily.

However, if we get a strong number then we could see getting right back to about 2.25% which is where we were before the last number. Now I believe the best scenario would be a number that is non-eventful and in-line with the consensus which should keep things status quo. I like this more for many reasons one of which is that it just continues the low rate sentiment in the market without any disruptions in the trading range.

Well the day is finally here for what I know the markets have been looking to ever since the weak NFP back on 4/6. That is the Federal Reserve Open Market Committee (FOMC) statement on Fed monetary policy. The calendar looks like this:

• 12:30- Release of the FOMC statement
• 2:00- Release of the FOMC Summary of Economic Projections
• 2:15- Fed Chairman Bernanke’s press conference

So we will have a wave of newsflashes that have the potential to significantly move the markets. Wall Street economists will be dissecting every letter, word and sentence of the statement like an invasive mother-in-law. The Fed has been sending mixed signals over the last few months so this is their chance to set the record straight and provide a clear understanding of where they stand on monetary policy. One point that the markets will be looking to is that their view of the state of the economy is consistent with their end of 2014 stance on keeping rates unchanged. There has been a disconnect between what they have been saying regarding the strength of the economy vs. the justification in keeping rates at current low levels all the way thru the end of 2014.

Since the strong close on Monday the bond markets have cooled down a bit leading up to today’s announcement. The 10yr closed @ 1.93% on Monday but we have grinded lower since with it currently sitting at 2.00%. Considering that it closed @ 2.05% on 4/6 after the weak NFP number, we should be pleased that we not only sustained the lower yields but were able to go even lower. Remember we were @ 2.23% seconds before the release of the NFP number.

As those who read this consistently know Wednesday is also the release of the MBA Weekly Application Survey. I am pleased to say that FFF outperformed the survey because the index showed that applications were down but our submissions were up. Anyway here are the highlights:

• Applications decreased 3.8%
• Refinance Index was down 5.6%
• Purchase Index was up 2.7%
• Within the Refinance Index conventional refi’s were down 6.1% and FHA refi’s were down 2.1%
• Within the Refinance Index 58.8% were fixed-rate 30yr, 23.1% for 15-year fixed , 5.2% for ARM’s and 12.8% other (10yr, 20yr, 25yr or 40yr)
• The refinance share decreased to 73.4%
• The average 30yr conventional rate was 3.81% w/.40pts
• The average 30yr FHA rate was 3.81% w/.52pts
• The average 15yr rate was 3.32% w/.41pts
• The average 5/1 ARM rate was 2.81% w/.37pts

(Image courtesy of MarketWatch)

Bond markets are opening up down as we have seen a quick change in the tone of the markets as we are now trading above the pivotal 2.00% 10yr (currently 2.02%). The Dow is approaching the 13k level and that is getting a lot of attention and it almost feels that reaching that level at some point today is almost inevitable as stock traders do not want to go into a 3 day weekend short.

There is a lot that can happen over the next 3 days in Europe so the safe bet is to not get in front of what appears to be strong bullish emotions in the stock market. The bullish tone in the stock market has been going on for over a month now but was given some fuel over the weekend when Barron’s wrote an article that the Dow could easily get to 15k by the end of next year if the problems in Europe were resolved and the US economy continued to show signs of a rebound. All this is pretty obvious but when Barron’s writes something investors listen. With all that said the trigger point in the selling in US Treasuries and another round of buying in the stock market occurred when the Fed released the minutes from their 1/25 FOMC meeting on Wednesday afternoon.

There was little to no indication of an eventual QE3 that many bond traders were hoping for. With QE3 now on the backburner there is no rush to front run the FED yet again. Therefore the markets are getting back to fundamentals which points to higher interest rates because the US is showing signs of a rebound and Europe is dealing with their problems be it slowly. However, this does and probably will change on a dime as we have seen whenever we get up to these levels on the 10yr.

As those of you who read this stuff regularly know I have been talking about this tight range in the 10yr since 11/1. Well we are now approaching the high end of the range which is 2.07% for the 1st support level and 2.11 for the second support level. If we manage to break those levels then all bets are off. If that happens then getting back to a <2.00% 10yr will take a pretty big and unexpected event.

The bond markets are opening pretty much unchanged from yesterday’s close but that is okay given the price action yesterday. The mortgage market was on fire yesterday as they impressively outperformed the rally in the bond market. We were testing the 2.00% level on the 10yr since the strong NFP number on 2/3 but it clearly appears that the bond markets will not have any of that. The NFP number has quickly become a distant memory and it is back to the safe haven trade of buying US Treasuries. We are opening with a 1.94% 10yr yield but the story yesterday was all about mortgages and GNMA(FHA) securities specifically.

However, I need to be fully honest by telling everyone that the reason for yesterday’s strong GNMA bid was not all good. There is concern about future supply with the proposed fee increases. The HUD budget proposal calls for increases in fees as a result of the concerns that the agency’s insurance fund continues to face capital ratios below it congressionally mandated rate. We have mentioned this issue in the past. This is accounting jargon for a way of saying that HUD’s insurance fund is running dry and there are legitimate concerns about their ability to cover the growing loss mitigation cost that comes with lending money to borrowers with relatively low credit scores at elevated LTV’s.

On top of that they still need to implement the 10 basis point g-fee increase that FNMA & Freddie did a few weeks ago as a result of the payroll tax cut. Remember that any changes to the FHA program must go thru Congress therefore this implementation was delayed so it can go thru the political system. However the increases by FNMA & Freddie do not require congressional approval in the same manner which is why that happen swiftly. Also expect to see an increase in fees for the FHA HLB and HUD is also expected to announce plans to increase MIP later this month. Obviously all this in its entirety have buyers of GNMA securities concerned that the supply of FHA loans will dramatically shrink. I agree.

On one last note regarding HUD… Many of you may have heard about the $25 billion settlement between federal agencies, 49 state attorneys and 5 major banks as a result of “improper conduct in the foreclosure process”. Well guess where some of that money is going to…that is right HUD. FHA officials said that they expect about $1 billion to go towards HUD to help prevent the agency from the political landmine of going to Congress for a taxpayer bailout. This issue with HUD is no joke and will be a mainstream story in the months ahead. That I am sure about.

It is Wednesday so we got the release by the MBA on it Weekly Application Survey. Here are the highlights:

• Applications decreased 1%
• The refi index increased .8%
• The purchase index decreased 8.4%
• The refi share increased to 81.1% from 80.5%
• The average loan size in January 2012 was $226k up from $207k in January 2011
• DC has the highest loan size @ $375k. Those brownstones in DC are not cheap.
• Indiana has the lowest loan size @ $143k
• The average 30yr conforming rate is 4.08% w/.51pts
• The average 30yr FHA rate is 3.87% w/.78pts
• The average 15yr conventional rate is 3.33% w/.40pts