Morning Report - VIX is spiking again

Vital Statistics:

	Last	Change	Percent
S&P Futures	1744.7	11.9	0.69%
Eurostoxx Index	2964.2	0.3	0.01%
Oil (WTI)	97.18	0.8	0.78%
LIBOR	0.236	0.001	0.36%
US Dollar Index (DXY)	81.11	0.103	0.13%
10 Year Govt Bond Yield	2.61%	0.04%
Current Coupon Ginnie Mae TBA	106.1	-0.3
Current Coupon Fannie Mae TBA	105	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.25

They take 'em away, they give 'em back. Volatility is back. Markets are higher this morning after yesterday's bloodbath that sent the S&P 500 down 40 points. Overseas markets got slammed, particularly Japan, which is down 14.5% for the year already. Bonds and MBS are lower.

The VIX went out at 21.4. This is an indicator of financial pain and fear - as it rises, it should correlate positively with bonds - meaning if the VIX increases, rates will be falling. We are still nowhere near the spikes we saw in 2011 and 2010, let alone the late 2008 panic, but it is something to watch. The main thing to understand is that there are two forces acting on interest rates right now - 1) the Fed's ending of QE, which is pushing rates higher, and 2) the sell-off in worldwide markets, which is causing the flight to safety trade which pushes rates lower. I would stress to your borrowers that all bets are off right now with interest rates. You could float and you might get lucky if someone blows up, or this could all blow over and we could be looking at 4.75% mortgage rates before you know it. 

Speaking of interest rate bets, the largest mortgage REIT - American Capital Agency reported earnings yesterday. They had been deleveraging since last Spring, when they took their leverage ratio from 10x down to 7.2x. Last quarter they increased their exposure to the MBS market a tad, taking their leverage ratio up to 7.6x. The company had been seeing value in the MBS space. REITs are major players in the space and their activity influences mortgage rates, so their activity is something to watch. Given how much rates have fallen, this looks like a winning trade for them. That said, the sector is very much out of favor as the secular headwinds are going to be tough to manage. 

Part of the reason for yesterday's sell-off was an absolutely dismal ISM report. The ISM manufacturing report came in at 51.3, vs street expectations of 56. This shows a major deceleration in manufacturing in the month of January. Many reports - durable goods, for instance - showed a slowdown in December, which seems to have continued into the new year. Some of this could be weather-related, but investors are bracing for a lousy jobs report this Friday. Separately, construction spending rose .1% in January, which was better than expected. 

The fireworks should start tomorrow with the ADP employment report, which is all honesty has been a terrible predictor of the employment report lately. We have another potential winter storm affecting the area as well, so tomorrow could be sloppy in more ways than one.