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

We are starting off the week pretty much unchanged from Friday’s close with the 10yr sitting at 1.90%. You do get the feeling that the bond/mortgage markets are fighting to make-up for the lost ground last week that was spurred on by the release of Fed minutes. Friday was an encouraging sign because there was no follow thru selling. The NFP report was not overly impressive but it was something to get the bond bears going again.

However, apparently that was not meant to be as almost all thought the market reaction to Thursday’s minutes was an over-reaction. The good news is that the economic calendar this week is very light until Thursday so it gives the markets a chance to reassess. The bad news is that it is a heavy week of “Fed speak” which is a term used to describe the numerous speeches that members of the Federal Reserve do from time to time. This week we have:

• Richmond’s Lacker- Tuesday @ 3:00
• Kansas City’s George- Thursday @ 1:10
• St. Louis’s Bullard- Thursday @ 2:00
• Minneapolis’s Kochermakota- Thursday @ 8:00pm
• Philadelphia’s Plosser- Friday @ 9:30

Now these guys give speeches all the time but it is a week where there are a lot of them. Given what happened last week, I expect a greater attention will be paid to what these guys have to say. I am not expecting any earth shattering information from these speeches but you never know. We do have a market that is highly dependent on the Fed so any signs of future involvement from the Fed that is not known will drive the markets.

The “good” news to come out last week is that mortgage applications were down a robust 21.6% for the last week of 2012. We do usually report this release but last week was pretty eventful and it just did not make the cut. This is good news because it does hinder supply in the market which will help maintain a strong bid for mortgages. So while mortgages will go down if the Treasury market goes down, it should result in mortgages going down less. This is commonly referred to as mortgage tightening.

There is some industry news information worthy of mentioning that came out between Bank of America and FNMA. It appears that BofA has thrown in the towel and decided to settle its exposure to outstanding and potential repurchases for loans between 1/1/2000 thru 12/31/2008. This does include loans that were originated from Countrywide as well of BofA. The settlement was for $3.6 billion. What is does do for BofA is that it helps put the distance from that dreadful Countrywide acquisition behind them. So that $4.1 billion price tag for Countrywide back in 2008 continues to make the signing of Jason Bay look like a brilliant move.

Before we get into the NFP numbers and what the market is doing as a result, we need to explain a little further just what happened yesterday @ around 2:00. The markets were just humming along like a typical quiet afternoon prior to a NFP number where everyone expects very little volatility. The Fed minutes from their December meeting was on the economic calendar but was not remotely mentioned because no one expected any news from it. So while the minutes did not expose any new information, the bond markets got spooked because it was “revealed” that a few Fed members would like to see the quantitative easing measures of treasury and mortgage purchases end sometime in 2013. As I said this is not ground-breaking news but it was enough to get a skittish bond market to react in mass as huge sellers.

Now let me make this crystal clear…when the Fed decides to unwind their bloated balance sheet by selling US Treasuries and mortgages, it will be a huge dose of reality to all of us that make a living in the bond/mortgage markets. We have been living in a fantasy world over the last few years with the Fed supporting the markets. THE CURRENT BOND YIELDS AND PRICES ON MORTGAGES ARE NOT REAL. They are a byproduct of a artificial buyer who’s objective is not driven by sound investment decisions. This is the equivalent of the Steroid Era in baseball where the Barry Bonds, Mark McGuire and Sammy Sosa records are tainted and mean nothing.

So the cold hard reality is that this is all smoke and mirrors which at some point in the future will blow up in our faces. At that point reality will set in and markets will once again be ruled by true investors and rates will have their true economic value. You can be assured that they will be much higher than where they are now and the “adjustment” will be very painful for all of us that are accustomed to seeing 450ft homeruns. We all need to realize this but with that said I do believe the reaction is severely overdone. So while reality is inevitable we still have some time left in fantasyland.

We are currently at 1.93% on the 10yr as a result of the Fed minutes and a decent NFP report. So while I think the reaction is overdone when you get close to these milestone levels like 2.00%, the markets do have a tendency to want to test them. Therefore I am very cautious while the dust settles and the focus goes back to the many reasons why rates should remain low.

The NFP number was slightly above consensus @ +155k with the unemployment level remaining unchanged at 7.8%. There was a slight upward revision in the November number that contributed to an additional 15k jobs. The report really does not have much to comment on because it is pretty vanilla so the markets had little reaction to it. It is not too strong to justify additional selling in bonds and it is not remotely weak to justify a reversal either. So today will be an interesting trading day as we find out just how concerned traders are about information on the Fed that was already known. Sometimes this stuff is more of a head-scratcher than the Jets.

Have a good weekend.



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

The market is opening up pretty much unchanged from yesterday’s close. This would normally be a boring start to what is always an exhilarating Market Update but what makes this quiet morning worthy of mention is that we got the monthly NFP report @ 8:30 which as we all know is the Granddaddy of them all (think Keith Jackson here).  This is because the number was definitely a strong number but close enough to the consensus and quite frankly there is a lot more going on out there and the report, dare I say, has become less significant. You almost get the feel that the market just wants to move on and focus on the next thing.

It is all part of the attention deficit disorder that most if not all traders likely possess. This has been the trend over the last several reports where it comes out, gets quickly digested, there is a marginal market move, trading levels return to the pre-number release and we move on. However here are the highlights worth mentioning:

• NFP increased 227k in February
• There was revision to both the January and December numbers resulting in a +61k improvement
• The unemployment rate remain unchanged @ 8.3%
• Government jobs lost 6k in Feb
• The participation rate increased to 63.9% from 63.7%
• Average hourly earnings rose a mere .1%

Something things worth noting:

• The participation rate did increase but the unemployment rate remained unchanged. This shows that those who entered the workforce found jobs.
• The average hourly earnings only rose .1%. This indicates that the strong job growth is highly weighted in lower paying jobs.
• The job growth is happening in the private sector as shown by the drop in Government jobs. This is always a great sign because it shows true job growth as opposed to padding the bureaucratic and inefficient Government payroll.

Let’s move on to a very disturbing story that hit yesterday morning. For those of you who are kind enough to regularly read these Market Updates than you know how I did not understand why our lawmakers aligned the payroll tax deduction with an increase in the g-fee. It just did not make sense to me that borrowers who are taking out new mortgages should pay for payroll tax deductions. I felt this was totally against the intended use of the g-fee which is to properly allow the agencies to generate reserves for future losses on loans. My opinion is not unique as the MBA venomously opposed the move but were obviously not successful. I felt it would open up a can of worms. Well it did not take long for some insane US Senators (Mary Landrieu, D-La & Richard Shelby, R-Ala,) to push for a bill that would extend the increase another year but instead of the 10bps it would be 7.5bps.

Sounds good right?? But get this… the reason would not be for continuing the payroll tax deductions that help all US citizens but the money would be used to help pay for continued cleanup from the British Petroleum Gulf Coast oil spill. Now I was very disturbed like most people by what happened there but I am equally disturbed that lawmakers are already tapping into this newfound method of taxation. What an easy way to pay for something by generating money thru a source that most voters have no clue about and, I hate to say, most mortgage professionals do not understand either. It is like they discovered gold mines in the valleys of California. There is a zero expectation that this will get passed so there is no need to panic. However if one thinks that the Government will not use an increase in the g-fee again to fund a political nugget (sticking with the gold theme) then they are just as crazy as the Jet fan who thinks Payton Manning will lower his standards by allowing Rex Ryan to be his coach.

Have a good weekend.