Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1323.7	-9.7	-0.73%
Eurostoxx Index	2162.6	2.3	0.10%
Oil (WTI)	89.51	-1.2	-1.38%
LIBOR	0.467	0.000	0.00%
US Dollar Index (DXY)	82.54	0.056	0.07%
10 Year Govt Bond Yield	1.69%	-0.05%
RPX Composite Real Estate Index	177.5	0.1

A sloppy tape to start the day as Euro fears take center stage. Spanish credit default swaps are at 522 basis points, an all-time high. Troubled Spanish lender Bankia continues to fall. Greek sovereign debt is over 30%. The beneficiary of the risk-off trade is the US 10-year, where yields are down 6 basis points. Meanwhile, oil cannot get out of its own way, with WTI down 15% this month.

The 10-year yield is flirting with the Sep low of 1.673%.  MBS are unchd, and we are witnessing a similar phenomenon as last fall, where the 10 year rallied and MBS underperformed. The spread between the Freddie Mac generic 30 year fixed mortgage and the 10-year bond yield is 2.04%.  Here is a chart of the generic 30 year fixed rate mortgage, the 10-year bond, and the spread between the two.

While mortgage rates are falling as the yield on the 10 year falls, they are falling much more slowly. So, if you are facing a lock decision, you have are faced with a bit of a conundrum:  If the 10 year yield continues to fall, mortgage rates might not participate. In other words, we may be reaching a floor in mortgage rates.  Which means you might as well lock.  On the other hand, if the 10 year yield starts backing up, mortgage rates should rise much slower since they really didn't fall that much to begin with.  Which means you have some room to wait and see what happens, and you might want to float. So, lock or float?  IMO, when markets crack, they crack quickly. And the 10 year is at very lofty levels. It could go from 1.7% to 2.4% in a hurry. The risk is more skewed towards mortgage rates increasing quickly than falling quickly. I would lean short in mortgage rates, or in other words, lock.

Part of the reason why the recovery has been so halting has been that the job market for those in their prime earnings years has been horrendous. Instead of making the top salaries of their lives (which they need to pay for college for their kids and also retirement savings), many people in their prime earnings years are either unemployed or underemployed.  This is a huge drag on the economy.