Monday Market Commentary: When Lenders Get Defensive, Rates Get Downward Sticky

by Alex Stenback on February 17, 2009

Empire State Econompic

“Manufacturing in New York contracted in February at the fastest pace on record, signaling the recession that began more than a year ago is intensifying.”
                                  – Via Bloomberg, Image via the awesome Econompic Data

Last Week:
Mortgage rates managed sort of a round trip last week as rates improved nicely for most of the week, then surrendered  their gains in a fairly ugly Friday selloff in the bond markets.  Still, 30 year fixed rates at or below 5% were on the table all weekend for most borrowers.

Early in the week rates made daily strides off of a succession of negative economic news – nothing new here.  Friday’s selloff was an “illiquidity” driven event with some forced selling and investors trying to square up positions ahead of a long weekend. Short weeks and holiday weekends often induce some weird behaviors in the markets, which is in part what we saw Friday – Just another volatile week is all.

This Week:
The holiday-shortened week started off mortgage rate friendly with bond markets in rally mode and stocks getting smoked out and shot (early) today.

The three day weekend was one big negative news cycle which painted a very bleak picture of the economy and and even bleaker picture of the government efforts to put it on life support. A horrible report from the Empire state manufacturing survey (pictured above) did not help.

As for the economic calendar proper, the Minutes of the last Fed meeting (Wed) and the Phildelphia Fed Index (Thurs) stand out as attention getters.  Producer and Consumer Price Indices also print this week, but inflation is a second-order concern (there isn’t any – deflation is a more credible threat) at the moment.

Recall: Bad news is generally rate friendly because capital seeks the safe haven of the bond markets, which pushes bond prices higher and rates/yields lower.

As of this writing, mortgage bonds have seen some fairly dramatic improvements in price since the market opened, though that price has not necessarily been reflected in the rate sheets from various lending channels.  This tells me that lenders are getting defensive in their pricing and it may take a significant event (DOW sells to 7000, or something like that) for rates to resume their march lower from here.

But hey, sub 5% mortgage money ain’t bad, so maybe the best bet is to grab it while you can and resist the temptation to get greedy here. They will go higher again, and maybe sooner than you think.
· This Week’s Economic Calendar [Barron's]

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