The bond markets are up a little bit to start the day but we are really just getting back to where we were yesterday morning after we did get a little sell-off that started late in the morning.  The ADP report came out this morning and it was much weaker than expect @ +119k when the consensus was +170k. That does set the stage for Friday’s NFP report where I guess the markets will not be totally surprised with a weaker report.

The consensus is currently at +165k so anything south of 125k will give this market the jet fuel that it wants but +200k will put a hold on the rally at least temporarily. However, the situation is percolating in Europe so any significant development will pretty much dwarf the news from the NFP report. I saw this morning where the unemployment rate in Europe is 10.9% which is a 15-year high. Not a good situation.  In the meantime we sit comfortably at 1.92% on the 10yr.

The reason for the sell-off yesterday was the strength of the ISM index which show unexpected growth in the manufacturing sector. Remember Lesson 101 about the bond markets…Good news is bad and bad news is good (yes I know that it’s a little bit evil which is probably why 99% of the world hates us).  This also caused a push up in stocks which got the Dow to the highest point (13,279) since Dec 2007. Stocks are definitely doing well so far this year. I am far from a “stock guy” but it is obvious that once the world economy is humming on all cylinders then the Dow could very easily go well above 15k. The fact that we are at 13k with still a lot of landmines out there is impressive. Of course we will be battling inflation once that happens but that is a whole different story for another day.

Yes it is Wednesday which means it is MBA Weekly Application Survey day. While the survey was pretty much unchanged there are some interesting nuggets in the report:

• Application increased a insignificant .1%
• The Refinance Index decreased .7%
• The Purchase Index increased 3.7%
• The refinance share decreased to 72.6%
• The FHA share of purchases was 37.0%
• The investor share was 5.7%
• The 30yr conventional rate was 4.05% w/.44pts
• The 30yr FHA rate was 3.80% w/.50pts. which is the lowest rate in the history of the survey
• The 15yr rate was 3.31% w/.41pts which is the lowest rate in the history of the survey
• The 5/1 ARMs rate was 2.87% w/.35pts

Well the Fed has been an originators friend for about 3 years now, but like any acquaintance that is based upon money there will be times when that friend lets you down. Yesterday was one of those days where this happened and I got the sense that this caught everyone off guard.

The announcement of the Fed’s minutes from their 3/13 meeting was clearly on the economic calendar for 2:00 yesterday but as is the case for most of these occasions it was not viewed as being a huge cage rattler. So much for what to expect. Yesterday’s reaction was very negative because the market participants viewed the text of the minutes to be very “hawkish” which in a nutshell means that the Fed will be aggressive in making sure their main mandate of existence which is to manage inflation will be done at the expense of cheap money in the form of maintaining low interest rates. This conflicts with the “dovish” stance of providing cheap money thru the manipulation of lower interest rates which they stated they would do until at least the end of 2014. One of the headlines form yesterday’s announcement is that a “significant outlook change could alter the 2014 rate plan”. I believe that was a big one.

The Fed has been “dovish” for what now seems like forever as they try to navigate thru a recession and financial unrest. However, as the dust is settling from yesterday’s sell-off, there have been enough economist that feel that the Fed was not so aggressively “hawkish” in their comments as originally thought. This does point to an argument that the sell-off was a bit of an overreaction. The bond markets are opening up today but we are still far off the highs from yesterday.

Regardless of your opinion of yesterdays reaction to the Fed’s minutes, it is a clear indication of the markets response to a Fed that will no longer support the bond markets. It is extremely important to remember that there was a time when the Fed did their inflation thing and had a marginal impact of the direction of US Treasuries and mortgages based upon their purchasing activity.

Key words there… based upon their purchasing activity. As we have mentioned in the past, when the Fed stops supporting the bond markets then it is time to board up the house and prepare for the hurricane. The best way to describe this is when you go to a party and everyone is having a great time but then the DJ plays the last song. What was a great party turns into a rush for the exit in a matter of minutes. You do not want to be the last one to leave because you then get stuck waiting an hour for the valet to bring you your car because there is a huge line in front of you. Well market participants do not want to be the last one out the door because instead of waiting an hour in the cold for their car the penalty in this case is millions (if not more) of dollars along with the continuance of a career. The Fed’s “exit” from the bond markets is one of those textbook events that if timed correctly by traders can make or break careers. Therefore as originators we need to be smart about these price moves and make sure that we protect our pipelines. Locking loans a day early vs. a day late is never a bad thing.

We did a quick look at the impact of yesterday’s sell-off on what was an impressive recovery from the sell-off last month. We looked at a benchmark 30yr conventional security over the last 30 days. Here are a few geeky number from the analysis. Take it for what it is worth:

• Prior to yesterday’s sell-off we had recouped 76% of the price from last month’s sell-off
• After yesterday’s sell-off we dropped to a 32% recoup in price from last month’s sell-off
• We are opening today with a 46% recoup in price from last month’s sell-off.

One last thing….the MBA Weekly Applications index came out this morning. The Refi Index was up 4.0%. The Purchase Index was up 7%. Conventional applications were up 3.1%. FHA applications were up 10.5%.

(Image courtesy of Jim Watson/AFP/The Star)