Market update April 2011 - Interest Rates May Climb!

Market / Update

Yesterday the Dow Jones industrial average finished with its best first-quarter performance since 1999, rising 6.4% in the first three months of the year.   Today U.S. stocks are up after the Labor Department said the unemployment rate fell to 8.8%, the lowest since March 2009, as companies added workers at the fastest two-month pace since before the recession began. The unemployment rate has dropped a full percentage point in the last four months. Economists had expected the unemployment rate to remain at 8.9%.

The economy gained 216,000 jobs in the month. That was higher that economist projections of 180,000 and also a significant improvement over the 194,000 jobs added in February. Private businesses added 230,000 jobs. Since businesses started hiring again a year ago, they have now added 1.8 million jobs, with nearly a third of those jobs added in just the first three months of this year.  Temporary workers, grew by nearly 30,000. That is important because many businesses will bring on temporary staff as a prelude to making permanent hires.

This is a day heavy with economic data. Later this morning, the Institute of Supply Management will issue its manufacturing index for March. Economists anticipate that the index fell slightly from February, when it hit its highest level since May 2004. The manufacturing sector of the economy has expanded for the past 19 months. Separately, the Commerce Department will issue a report on the construction of new homes in February. Auto companies will release March sales figures throughout the day.

Treasuries yesterday ended the first quarter with a second straight three-month loss.  Today Treasuries dropped, pushing the yield on the 2-year note to a 10-month high, after the Labor Department report was released.  Bonds extended a second weekly decline based on views that the recovery in the labor market may lead the Federal Reserve to stop its $600 billion program of Treasury purchases earlier than planned. Adding fuel to the discussion is St. Louis Fed President Bullard’s statement that the Fed bank may need to begin an exit even with global uncertainties in Japan and the Middle East. 

Traders are increasing their belief that policy makers will raise borrowing costs by the end of 2011. Fed funds futures show a 45% chance the central bank will increase its target at the December meeting, compared with 35% odds yesterday. The central bank has kept its target for overnight loans between banks, the fed funds rate, in a range of zero to 0.25% since December 2008.  The market’s anticipation of the target being raised comes from comments being made by various Fed Presidents.  Philadelphia Fed President Plosser said the economy may improve quickly enough that the central bank would need to raise borrowing costs before year-end. Kansas City Fed President Hoenig said this week that “highly accommodative” monetary policy in the U.S. is stoking commodity prices and the benchmark interest rate should rise toward 1% soon. Minneapolis Fed President Kockerlakota told the Wall Street Journal policy makers may increase their key rate 75 basis points by late 2011.

TBAs opened higher yesterday, but quickly turned around and traded off during the day, closing down by 30bps.  This market movement created the worsening price of CF30 +3/8; NCF30 +1/4; GF30 +3/8; NC5/1 +1/4; ConfARM5/1 +1/4 yesterday.  This morning, prices have fallen even further as the production coupons are down between 18bps and 25bps.  The yield on the 10-year treasury note is up to 3.50%.  The market has created an initial worsening price  of: CF30 +1/4; NCF30 +1/8; GF30 +1/4; NC5/1 +1/8; ConfARM5/1 +1/4.

It is coincidental that the rapidly worsening TBA and mortgage rate markets are transpiring on April 1^st.  Not because of April Fool’s Day but because of regulations taking hold today.  Today is our opportunity to utilize and protect our pricing strategies.  Update your pricing strategies to know your market and use price exceptions when needed in a price objection process.

Maintain a focus that we are in an overall worsening mortgage rate cycle.  Educate your customers on a sense of urgency and ensure that you negotiate and compete with rate quotes based on same day and same time. Utilize the steep yield curve to offer alternative product solutions for your customers in meeting their financial objectives by creating great payment savings for your customers with fixed 5, 7 or 10 years periods.