Morning Report - Annaly Capital's view on interest rates

Vital Statistics:

	Last	Change	Percent
S&P Futures	1841.5	-0.4	-0.02%
Eurostoxx Index	3122.4	-25.8	-0.82%
Oil (WTI)	102.8	0.3	0.24%
LIBOR	0.236	0.003	1.20%
US Dollar Index (DXY)	80.49	0.061	0.08%
10 Year Govt Bond Yield	2.65%	-0.01%
Current Coupon Ginnie Mae TBA	106	0.0
Current Coupon Fannie Mae TBA	104.8	0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.37

Markets are flat this morning after a mixed bag of economic data. Durable Goods Orders came in better than expected, but initial jobless claims were a bit high. Bonds and MBS are rallying.

Some interesting tidbits on the Annaly conference call. Annaly is a big buyer of mortgage backed securities. 

• Regarding the Fed: "I think they will continue to taper come hell or high water; with respect to the Fed target, I think that's another story altogether. They have already backed down a little bit."
• Regarding MBS and tapering "The market has sobered up a little bit about the implications of that lack of demand." 

Annaly expects to boost their leverage ratio to 7x over the next several quarters, which is high for them. It is an aggressive bet that (a) MBS have gone down about as far as they are going to go, and (b) short term interest rates are going nowhere for the near and intermediate term. In other words, Annaly thinks the top in mortgage rates is in for the next few years.

The House will consider a reform of the CFPB to bring some sort of accountability to the agency. Right now, it is funded from the Fed and there is no Congressional oversight of the agency. The plan would be to replace the single, non-accountable director with a five member commission, subject the agency to the normal appropriations process and prevents the CFPB from undermining the safety and soundness of U.S. financial institutions through regulatory overreach. Probably DOA in the Senate if it even gets there, but a marker has been laid down. At some point, the CRA types are going to get annoyed that more credit isn't being extended to their preferred constituencies and it is possible they might put 2 and 2 together and realize that the CFPB is being a drag on credit creation. 

New Home Sales increased to an annualized pace of 468k, much higher than expected. December's numbers were revised upward. Average selling prices have been increasing for the builders due to low inventory and increasing activity at the higher price points. At some point, they won't be able to raise prices the same way and will have to pump out more homes in order to drive the top line. Remember, we used to consider 1.5 million housing starts per year normalcy. The most recent starts number of 880k was the sort of number we used to find at the depths of recessions. We have been barely keeping up with obsolescence, and we have a tremendous amount of pent-up demand.