THE BASIS POINT

WeeklyBasis 3/20/10: Critical Economic Outlook Week Coming

Despite volatility last week that caused rates to move up and down about .2%, we ended the week even. Business and consumer inflation reports both showed that inflation is under control. The Fed reiterated this after their FOMC meeting Tuesday, and left overnight bank-to-bank and Fed-to-bank rates at .25% and .75% respectively.

Rates were especially volatile Friday as mortgage bond traders contented with the threat from Moody’s and Fitch that U.S. debt may lose its AAA rating, and the volatility will continue next week. We’ve got 2, 5 and 7 year Treasury auctions, and while these shorter durations don’t directly compete with mortgage bonds, it’s still more bond supply—too much supply can cause mortgage bonds to sell off which pushes rates up.

Friday we also have the third and final revision to 4Q09 GDP, which will be close to the 5.9% reported last month. More important is where the economy is going, and we’ll hear this economic outlook from 10 different senior Fed officials making public speeches throughout next week. It started today with Fed chairman Ben Bernanke telling an independent banking group that “It is unconscionable that the fate of the world economy should be so closely tied to the fortunes of a relatively small number of giant financial firms. If we achieve nothing else in the wake of the crisis, we must ensure that we never again face such a situation.”

Next week’s most significant market moving speeches/testimony as follows: Treasury Secretary Tim Geithner testifies Tuesday before the House Financial Services Committee on the future of housing finance and the Fed’s role in responsible home ownership, Kansas City Fed President Thomas Hoenig, the only FOMC member who has voted to hike rates (at last 2 FOMC meetings), will give a speech Wednesday entitled ‘The Financial Foundation for Main Street’, and Thursday Bernanke will tell Congress how the Fed intends to unwind the stimulus and what the economic implications might be.

I’ve got a rate locking bias going into next week.

CONFORMING RATES ($200,000 – $417,000) – 1 POINT
30 Year: 4.875% (4.99% APR)
FHA 30 Year: 4.875% (4.99% APR)
5/1 ARM: 3.375% (3.49% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) – 1 POINT
30 Year: 5% (5.12% APR)
FHA 30 Year: 5% (5.14% APR)
5/1 ARM: 4.375% (4.49% APR)

JUMBO RATES ($729,751 – $2,00,000) – 1 POINT
30 Year: 5.75% (5.87% APR)
5/1 ARM: 4.75% (4.87% APR)