THE BASIS POINT

Those Aren’t Bumps In The Road, That’s The Road

 

“Those aren’t bumps in the road, that’s the road.” This is a proper way to describe rate markets from early-crisis to present, and yesterday was no exception. Fixed-income prices fell and rates rose after the private-sector jobs report from ADP painted a brighter picture of the U.S. economy. The 10-yr yield hit 3.50%, although it finally closed at 3.48%, and current coupon mortgage-backed securities dropped by about .75 in price, translating into 5% rates for on single family loans up to $417,000 and higher for larger loan amounts and condos.

Payroll processor ADP showed an expansion of 297,000 jobs in December, nearly triple economists’ consensus forecast, and caused economist to ratchet up their estimates for tomorrow’s nonfarm payrolls data. Estimates now are coming in around 175,000 for a pick-up in non-farm employment instead of the 140,000 prior to the ADP number. Still, keep in mind that historically the ADP number has not had the best track record for predicting the government’s official report. Should the payrolls report tomorrow turn out to be strong, it is likely to raise questions about how much longer the Federal Reserve will conduct its Treasury buying program to stimulate the economy, and stimulate conjecture about the Fed possibly raising short term rates.

And as we know, any kind of decent recovery is going to rely on jobs and housing. Housing has been pretty dismal, but if jobs pick up, that is a huge step. The mortgage-related thinking goes that if more people are working, more will qualify for loans, buy houses, inventory levels will drop, and more home markets will either stabilize or improve. But that takes a while to happen, of course. And agents and companies who have based their business on refinancing will feel the pain. In fact, I am hearing antidotal stories of locked pipelines and applications dropping 50% in recent weeks, given the combination of rates moving higher, existing pipelines funding, and new business being slow.

The direction of any rate market bets is likely to be heavily influenced by projections on the U.S. economy, with jobs data the most important indicator. Fortunately for mortgage rates, mortgages typically trade well (relative to Treasury rates) at the beginning of new quarters as investors start making new allocation decisions and January 2011 has been no exception to this guideline.

 

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