Morning Report: Rates are back to pre taper-tantrum levels

Vital Statistics:

	Last	Change	Percent
S&P Futures	1822.6	-24.9	-1.22%
Eurostoxx Index	2882.8	-13.8	-0.48%
Oil (WTI)	26.84	-0.63	-2.40%
LIBOR	0.619	0.001	0.10%
US Dollar Index (DXY)	96.44	-0.850	-0.87%
10 Year Govt Bond Yield	1.62%	0.02%
Current Coupon Ginnie Mae TBA	105.3
Current Coupon Fannie Mae TBA	104.7
BankRate 30 Year Fixed Rate Mortgage	3.64

Global stock markets are down again on no real news. Whatever comfort markets took in Janet Yellen's remarks yesterday are over. Bonds and MBS are up, with the 10 year bond yield pushing a 1.5% handle.

Speaking of Janet Yellen's plan to continue to increase the Fed Funds rate, the markets are not buying. The Fed Funds Futures contracts are forecasting no rate hikes until 2018.

Loan officers, you have been given an unexpected gift with the 10 year. Rates are now at the pre "taper tantrum" level when the Fed started bracing the markets for the end of QE. So I guess the Fed didn't need to purchase $4 trillion worth of assets to get rates down?

Initial Jobless Claims fell to 269k from 285k last week. It bears repeating that these numbers are exceptionally good and are associated with boom times. The tape doesn't care, but still...

The Bloomberg Consumer Comfort Index rose slightly to 44.5 from 44.2 last week. Lower gasoline prices are helping improve the mood. 

Most commodities have been getting crushed lately, however one has been on a tear: Gold. Gold is a strange animal, in that it is one of the few financial assets that isn't some else's liability. The price of gold can be considered to be the (inverse) confidence indicator in the world's central banks. Gold up, confidence down. 

Continuing on the central bank thread, one of the bright spots in the US markets has been auto sales. This has been driven by a couple things: The biggest was that people deferred replacing cars until they absolutely had to due to the lousy economy. However another reason is cheap credit, and some hedge funds think they have found the new "big short" in subprime auto. When you can get an 8 year loan for a new car at a rate below the 30 year fixed rate mortgage, something is awry. 

So, yet another pillar holding up the economy was based on cheap credit. Janet Yellen must feel like Michael Corleone: “Just when I thought I was out, they pull me back in.”

The House Financial Services Committee is having a hearing today on FHA MIP. Expect Democrats to push for another cut and Republicans to be against it. The Democrats are in a strange position with the base continuing to push for even tougher regulations for the industry and the affordable housing types getting sick and tired of the tight credit that results.

Morning Report - Undiversified Bond Investment?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1558.1	1.3	0.08%
Eurostoxx Index	2633.5	21.0	0.80%
Oil (WTI)	96.39	-0.2	-0.20%
LIBOR	0.283	-0.001	-0.35%
US Dollar Index (DXY)	83.07	-0.148	-0.18%
10 Year Govt Bond Yield	1.85%	0.01%
RPX Composite Real Estate Index	190.5	-0.3

Markets are flattish on the last trading day of the quarter. 4Q GDP was revised upward from + .1% to + .4%. Personal consumption was revised downward as well.  Initial Jobless Claims rose last week to 357k. Bonds and MBS are flat.

The bond markets close at 1:00 pm EST today. Expect very little action today as traders will probably flatten positions ahead of quarter end.

The Office of Comptroller of the Currency has released the 4Q mortgage performance metrics. 89.4% of all mortgages are current, up from 88.6% last year. Delinquencies and foreclosures are down as the pipeline gets cleared and real estate prices start rebounding. More and more servicers are turning to mods as opposed to foreclosure initiations. The recidivism rate on these mods is around 17%.

The Private Label Securitization market is returning faster than people thought. Prior to this year, the only deals were the occasional Redwood Trust jumbo deal.  JP Morgan recently announced a deal, and now Springleaf plans a $1 billion subprime deal. The palette of products originators can offer is expanding in a big way.

FHFA has made mods easier to do on delinquent mortgages - anyone who is more than 90 days delinquent is automatically eligible for a loan mod. Borrowers do not have to show a financial hardship any more. This will only apply to Fan and Fred loans, and mods will be rate / term, not principal reductions. So this begs the question:  Why won't everyone stop paying their mortgage in order to get a mod?  FHFA said they would use existing "screening measures to prevent strategic defaulters."  Whatever that means.

Is your house an undiversified bond investment? Was house price appreciation driven by falling interest rates? And does that mean that when rates start rising house prices will fall again? I would point out that interest rates aren't the only factors affecting home prices - population growth, incomes, the availability of credit, and even global capital flows play a role. He does have a point, which is that a rapid rise in home prices like we saw from the early 90's to 2007 is unlikely to be repeated given that we won't have the tailwind of falling interest rates to increase affordability. That said, low interest rates can last a long time - from the end of WWI to the mid 60's, short-term rates were 5% or lower. From 1932 to the mid 50's, short term rates were under 2.5%.  I would also point out that real estate prices increased during the 1970s, even as short term rates moved up to 15%.