April Fools has come and gone as has Opening Day for the Mets and Yankees but yet one thing that remains the same is an origination friendly interest rate environment. The fact that we are sitting at a 1.83% 10yr while stocks are trading at all-time highs should make us all stand up and applaud. Something that A-Rod will not see in Yankee Stadium for a very long time. We all know how we got here with the recent turmoil in Europe but we all have to be encouraged that we are managing to stay here in-spite of some presence of doubt. We did get a domestic boost to lower bonds yields this morning with the release of the ADP report for March which was 42k below consensus @ +158k. There was a revision to Feb which showed an additional +39k but people like headlines so the market reaction is a little bullish for bonds and bearish for stocks. Either way I do not expect any additional focus on this report as the day goes on as all eyes start to turn to Friday’s NFP report for March.
The consensus for this is +193k with the unemployment rate remaining unchanged @ 7.7%. As we know this is always a big number but who knows anymore. Yes, it is a big market mover for that day and even the next few days thereafter. However, if you recall we did have a very strong number last month that brought the 10yr to a 2.06% close back on 3/8. Yet here we stand @ 1.83% a few days before the next report. A very impressive 23bps rally fueled by our grappa enhanced banker friends in Cyprus that were seriously investment challenged. So in-spite of a strong domestic employment report, we clearly see what investors are more concerned about. Well at least bond investors because we all know that stock investors shrugged off the Cyprus situation like it never happened. However this latest bond rally has been a little quiet in a way but still very impressive.
Some industry news…yesterday FNMA reported profits for 2012 at a robust $17.2 billion. Now if you think that is some serious scratch then you are correct. In fact, it is its first annual profit since 2006 and its largest profit EVER. Now they did lose a mere $166.6 billion between mid-2007 thru 2011 but let’s just let bygones be bygones. There are many angles to this story. One is how they have got their act together and now have figured out how to manage risk. Another about how the rebound in the housing market has been another big factor in the turnaround. All true. The storyline that will not get too much press is how they have raised this mysterious G-fee by about 20-25bps over the last few years which basically is the vig that they charge for the implied government guarantee. This 20-25bps translates to about 1.0-1.5pts in total execution which does indeed filter down to the borrower in the form of a higher interest rate.
Now no one is really up in arms over this because we are at or near all-time lows in interest rates thanks to the artificial stimulus of the Federal reserve(makes you wonder how “independent” these gov’t entities are when they all benefit from the same course of action…food for thought). So we are all under this influence of a free money high. But when you take a step back and realize how insane the cash infusion of the higher g-fee’s are for the agencies, is there any wonder why they are breaking profitability records?? While I do believe steps have been taken to prevent the agencies from losing another $100+ billion again, there should be limited praise in this “accomplishment” when you consider how much money they are clearing from the start (or as Andy Jr. likes to say from jump street). To me it is like praising Paris Hilton for being wealthy.
Last but not least we had the Weekly MBA Application Survey. It was down and here are the highlights:
- Applications were down 4.0%
- The Refinance Index was down 6.0%
- The Purchase Index was up 1% thanks to the boost in FHA applications due to borrowers trying to get in before the increase in FHA premiums were to take effect on 4/1
- The refinance share dropped to 74% from 75%
- ARMS stayed at a anemic 5%
- The average 30yr conventional rate was 3.76% w/.43pts
- The average 30yr FHA rate was 3.48% w/.38pts
- The average 15yr rate was 2.99% w/.36pts
- The average 5/1 ARM was 2.60% w/.32pts