Monday Market Commentary: Rates Drop on Economic Anxiety, Federal Backstopping of Fannie, Freddie

by Alex Stenback on July 14, 2008

Last Week:
Mortgage rates continued their recent rally lower as stocks were pounded for most of the week.  As regular readers know, when stocks are dropping, the money coming out of stocks often flows into bonds, which in the case of mortgage bonds, drive interest rates lower.

Also helping the cause of mortgage rates were encouraging words from the Fed, vowing to backstop any large scale meltdowns in the credit markets.

This Week:
Mortgage bonds are starting off the week in rally mode again.  Treasury Secretary Hank Paulson all but affirmed a Federal role in support of mortgage giants Fannie Mae and Freddie Mac by asking congress to allow Federal Lending and even the ability to purchase stakes in the agencies.  In short, they will not be allowed to fail.  These two government charted agencies, who touch upwards of 70% of all mortgages, have been under intense pressure to raise capital and shore up their balance sheets as their stock prices have tumbled to multi-decade lows.

We’ll monitor developments on this front throughout the week, but so far, the reaction to an increased Federal role in the agencies has been well recieved by market participants.

And if the above weren’t enough, we also have a busy economic calendar to contend with.  Early in the week, we have the Producer, and Consumer Price Indices (Tue and Wed respectively) which will give the markets a read on inflation.  Any "hot" infationary data could move rates up.

The minutes from the most recent Fed meeting will be released Wednesday, and can often move rates as the market gets further insight on the Fed’s thinking.

Later in the week, we have a peek at the health of the manufacturing sector via the Philly Fed Report, a weak number here woudl likely help mortgage rates.

Stay tuned, it could be a wild week…

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