Tuesday 10/28/2008

10/28/2008

Another bad day for the rate markets.
Yesterday mortgage prices plunged 30/32 with rates up about 50 basis points, today mortgages off 19/32 with another 25 basis point increase. The long end of the curve took the biggest hits, with the 10 yr note yield jumping 16 basis points. The stock market is very oversold and due for a strong bear market rally that we believe started today and gained momentum right into the close. Mutual fund selling is about over in equities but those hedge funds are still leveraged and difficult to tell if they are finished their forced selling for the moment. Looking at all of the technical's on the three key indexes, the selling recently has held the lows put in on Oct 10th. Not good news for the rate markets; with huge amounts sitting in treasuries if equities gain traction in the near term it will likely drag treasury and mortgage prices lower. That said, the strength of today's stock market move may have shot the wad for most of the potential rally.

Although the stock market is looking like it has put in a bottom at these levels; any rebound now isn't likely to last long or climb too high as the economy still has a lot of headwinds and not likely to see improvement for many months. We expect unemployment to increase to over 7.0% within the next four to five months (now 6.1%). Consumers are tapped and will pull in their spending, with the coming Christmas shopping season one of the worst in years. Today the Conference Board released their consumer confidence index; it plunged to one of the biggest month to month decline we have seen in years, from 61.4 in Sept to 38.0 in October----undoubtedly its the crashing equity markets and the losses in 401Ks and other retirement investments.

Markets continue to look for a 50 basis point cut from the FOMC meeting tomorrow when the statement is released at 2:15. Do not look for any major change in the rate markets however; this time a rate cut will have little impact on interest rates. Markets are well aware of the coming cut and have not reacted to it as is the usual case. We are more interested in rate cuts coming from the ECB and the bank of England when they meet.

Lenders of all types are keeping their purses shut; borrowing money for autos, homes and credit cards remains tight. To measure the potential length of the recession look at the residential real estate market and further to mortgage credit underwriting. Not anything being said these days about dealing with the mortgage market crisis, except to throw money at banks and open credit lines for banks to keep them floating. Obviously, that is necessary but it only goes so far. The US economy is built on consumers and consumers are motivated primarily on housing markets. Lets not take our eye off the ball with the alphabet soup of various bailout packages that the Fed has initiated. Treasury must step up and start buying mortgages!

The number of vacant houses for sale edged up to 2.23 million vacant units in the third quarter from 2.1 million units in the second quarter, according to a Census Bureau report, as foreclosures continue to bolster this inventory of unsold homes. The number of vacant houses on the market rose above 2 million in the fourth quarter of 2006 and has not retreated despite builders slashing construction of new homes to levels not seen in 26 years. (Nat'l Mtg News)

This afternoon's $34B 2 yr note auction was well bid but the rate was higher than in the WI trading prior to the 1:00 auction. A 1.6% rate against 1.57% trading in the WI market this morning, a solid 2.49 cover and a high 42% indirect bidder take (foreign investors). The previous auction saw a 2.115% rate and a 2.21 bid-to-cover with a 27.9% indirect bidder participation rate. Tomorrow $24B of 5 yr notes goes off.

Tomorrow expect the stock market to open better and rates under additional pressure. The stock market is starting a bear market recovery that shout increase the DJIA index 1000 to 1500 points in a choppy back and worth process. At 2:15 the FOMC announcement; if the Fed cuts only 25 basis points it will disappointment markets as most are fully expecting 50 BPs. At 8:30 Sept durable goods orders, a volatile series, is expected down 1.0%.
The dollar had a good day against the yen but weaker against the euro. Crude oilat about unchanged at $63.00. Gold traded up about $4.00.

Keep rate locks locked in overnight.