The outlook in early 2004 looks positive for mortgages due to strong carry, a range-bound rate outlook, a continued steep yield curve, slowing prepayments, higher Treasury issuance with lower mortgage issuance, and a normal uptick in buying following the year-end. The range-bound outlook got support from the November personal income and outlays report. According to Lehman Brothers economists, the data confirms the disinflationary trend as the core PCE deflator continues to decline. This measure is the Federal Reserve's favorite for inflation, and is currently below the Fed's likely target, said Lehman's economists. They conclude from the report that "the Fed has a long way to go before they can consider raising rates."
While the outlook is positive, mortgages continue to be rich. This has some potential negative ramifications. According to recent comments from Morgan Stanley, the GSEs would slow their mortgage portfolio growth as a result. This was seen in the November business reports from both Fannie Mae and Freddie Mac. If this continues, the GSE's funding needs would decrease. Therefore, says Morgan Stanley, the mortgage/agency basis should remain a focus factor due to ramifications of potential supply.