Morning Report: Surprise refi boom

Vital Statistics:

 

Last Change
S&P futures 2850 -24.5
Oil (WTI) 52.746 -.94
10 year government bond yield 1.63%
30 year fixed rate mortgage 3.86%

 

Stocks are lower this morning on continued trade fears. Bonds and MBS are up.

 

New Zealand cut its short term interest rate more than expected, which sent sovereign yields lower overnight. The German Bund is approaching negative 60 basis points, and UK Gilts just dropped below a 50 basis point yield. All of this pushed US Treasury yields down to 1.62% overnight and we are now sitting at 1.63%. 2s-10s are at 10 basis points, and the September Fed Funds futures are now pricing in a 100% chance of a cut, with a 1/3 chance of 50 bps and a 2/3 chance of 25 bps.

 

fed funds futures

 

Mortgage rates have been falling along with the drop in yields, but they have been lagging the move. We are seeing compression high up in the rate stack, which means that the higher note rates are not improving by much. Why is that? Prepayment fears. Given the drop in rates, it is a risky bet to pay 105 for for a Fannie 4.5% coupon bond when the 2.5% are trading at par.  Those 4.5% MBS might prepay so quickly you won’t make up for that extra premium you paid. Hedging issues are also coming into play here, as MBS investors generally abhor rate volatility and we have been getting a lot of it. Bottom line, this is good news for mortgage bankers, but prepare to be disappointed when you run new scenarios. Rates are better, but not by as much as you would expect.

 

Mortgage applications increased 5.3% last week as purchases decreased 2% and refis increased 12%. On a YOY basis, refis are up 116%. Take a look at the chart of the MBA refi index below. Houston, we have a refi boom. Now if we could only do something about housing starts….

 

refi index

 

Lost in the noise about interest rates was another strong job openings report. The JOLTs job openings came in better than expected at 7.35 million and the prior month was revised upward to 7.38 million. The quits rate was flat at 2.3%.

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