Morning Report – warning signs in the money markets 10/04/13

Vital Statistics:

Last Change Percent
S&P Futures 1673.5 3.8 0.23%
Eurostoxx Index 2915.7 13.6 0.47%
Oil (WTI) 103.6 0.3 0.32%
LIBOR 0.243 0.000 0.00%
US Dollar Index (DXY) 79.98 0.233 0.29%
10 Year Govt Bond Yield 2.63% 0.02%
Current Coupon Ginnie Mae TBA 105.6 0.1
Current Coupon Fannie Mae TBA 105.1 0.2
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.25
Markets are higher this morning on no major news. Since we have the government shutdown, the all-important jobs report that was scheduled for this morning will be delayed. Bonds and MBS are down small.
Even though we don’t have any economic data today, we have a lot of Fed-speak. Fisher will talk at 8:30, Dudley at 9:15, Stein at 9:30, Lacker at 12:30, and Kocherlakota at 1:45 (all times EST). With no data to chew on, the market will probably react more strongly to any new revelations than it otherwise would.
With no economic data to analyze, the Fed will almost certainly maintain its present course of asset purchases at the October FOMC meeting. While the Fed does have their own econometric models and independent sources of data, they do rely on inputs from the Federal government agencies. The bigger question is about December. Does Ben Bernanke want to start the tapering process on his watch or throw the whole thing to Janet Yellen? And does Janet Yellen want to taper at all? She may not. This whole shutdown has thrown a wrench in the conventional wisdom over tapering, which means QE may stick around a little while longer than we thought. Doing nothing at the December meeting is still a long-odds scenario, but it is getting less and less so.
The dynamic I would watch in the bond market is that anything that points to a deal would be bond bearish, and continued gridlock is bullish. Here is one area of concern though – the short term Treasury markets. I already discussed the issues with the repo market and here is another: the 1 month T-bill has increased in yield as the debt shutdown has gone on. It is now a higher yield than the 1 year. Heard on the Street has a piece on how a debt ceiling breach will impact the money markets. While no one anticipates another 2008, things could get dicey. If anything is going to push the S&P 500 over the edge and get everyone’s attention in Washington, this will.
Chart: 1 month T-bill yield

We are starting to see the Federal government move towards bringing back items piecemeal. Currently there is are bills that would commit to pay furloughed federal workers their back pay once government gets back up and running. Naturally Democrats don’t like these sort of bills because they want to use the leverage of mad constituents to force Republicans to drop their opposition to a clean continuing resolution. Republicans are taking a page out of the sequester strategy, where they fixed the air traffic controller problems with a simple bill. Behind the scenes, the Tea Party is wearing thin on most everybody and at some point the more senior Republicans are going to say enough is enough. Separately, John Boehner is telling people he will avoid a default on the federal debt. It is looking more and more likely that any sort of deal with be a two-fer, handling the budget and debt ceiling.
HUD has released its own rule on QM – any mortgage (aside from HECMs) that do not meet the points and fees requirements will not be eligible for insurance. This is a proposed rule, which will be open for comment. HUD will handle the points and fees a little differently: Under CFPB, the APR has to be below 150 bps over the average prime rate offer (APOR). Under the HUD proposal, it has to be less than 115 basis points over APOR plus the mortgage insurance premium. This intends to alleviate concerns that higher MIPs are causing loans to breach the threshold. HUD believes MIP will add about 135 bps to APR, so, the punch line is that a loan that is withing 250 bps of APOR would fall within safe harbor.
Banks are abandoning mortgage pre-approvals, according to CNBC and moving towards conditional approvals that usually last about 90 days.
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