Another ugly week for stocks (DJIA shed 485 points) failed to meaningfully move mortgage rates, which finished the week almost exactly where they began, with best case pricing for most 30 year fixed rate mortgages at or below 5%.
Normally, major stock indices hitting 10+ year lows would produce lower mortgage rates. Here’s how: As investors flee stocks and pour money into the safe haven bond markets, bond prices move higher, and rates (or yields, more properly) move lower.
But last week, mortgage rates did not improve, despite an obvious increase in demand for bonds. That’s because, despite all of the dollars shifting into bonds (new demand), bond markets have been flooded with new “issuance” (new supply) – they basically cancel one another out, and mortgage rates stood still as a result.
Primary market movers will be still more new supply hitting the bond markets, the ongoing saga and debate on the failing banking sector, and a fairly full economic calendar.
• $94 billion dollars worth of supply hits the bond markets. This is a large number even in an environment where $500 billion has started to seem like a penury and may act as a brake on any downward movement for rates.
• Ben Bernanke is scheduled to provide annual testimony (Tuesday) on the Fed’s view of the economy and monetary policy. Word bombs within could move markets and or rates.
• The markets reaction to the latest non-plan plan (including the possible 40% taxpayer stake in Citi) to save the banking sector will be keenly followed.
• The economic calendar gives us a reading on the housing market via existing home sales (expected to increase, though prices will be down) and new home sales (which will be lower, IAL)
Also on the calendar this week are durable goods orders, 4th Quarter GDP, and the Chicago purchasing managers index (a proxy for manufacturing sector health) The preceding reports are all standard fare and unless they print figures far worse than expected, market reactions should be muted. All eyes are on the banking sector, and the government.
This Weeks Economic Calendar [Barron's]