December started off with a sharp rally on Monday as investor anxiety picked up over the state of the subprime and credit markets, as well as the growing odds of a 50-basis-point cut in the funds rate. The jitters were brought on in part by a press conference from Treasury Secretary Henry Paulson talking about a plan he is working on with large banks designed to help subprime borrowers, coupled with further gains in Libor.
The 10-year Treasury soared 20 ticks higher on the day, sending the yield to 3.893% and 2s10s curve six basis points steeper to 99 basis points. There was heavy volume in mortgages with servicers buying 5s outright and moving down in coupon from 6s and 5.5s. FNMA 5% coupons were up 11/32nds on Monday. Other investor flows were mixed, though overseas buyers were reportedly more active. Adding to mortgage woes was the weakening in dollar rolls as a result of the higher cost of funds.
Although Treasuries started higher on Tuesday, they moved off those highs as the day progressed. The higher opening brought out selling from real money that widened spreads and eventually drew in interest from leveraged accounts, overseas investors and money managers who were focused on up-in-coupon trades. Servicers were mixed, with some continuing to move down in coupon while others were moving up in coupon.
Mortgage spreads were tighter on Wednesday morning as Treasurys sold off, following the strong ADP employment news, which suggested a much stronger non-farm payrolls report for Dec. 7. Ahead of the news, consensus was calling for non-farm payrolls at 65 thousand in November, down from 166 thousand in October, with initial talk substantially lower. Following the ADP news, Lehman Brothers revised its estimate to 125 thousand from 90 thousand, while Deutsche Bank changed its projection to 125 thousand from 75 thousand. Treasurys were trading lower as a strong employment report reduced the odds of a 50-basis-point cut this Tuesday.
In the first half of the week, originator selling averaged about $1.25 billion per day. Supply became more focused in 5.5%s.
For the month of November, the Lehman Brothers MBS Index returned a negative 101 basis points, bringing year-to-date return to negative 223 basis points. On the positive side, mortgages outperformed ABS, CMBS and corporates for November, as well as leading these sectors year-to-date.
This week's highlight is the Federal Open Market Committee meeting on Tuesday. Expectations are for a 25-basis-point cut in the Fed Funds rate. Odds increased for a 50-basis-point cut, but the strong ADP employment report suggesting a stronger-than-expected non-farm payrolls report on Dec. 7 reduced those odds.
In mortgages, Dec. 10 begins 48-hour notification for Class A and on Friday for Class B. Rolls were pressured last Monday by higher funding costs, though they had improved from those levels by mid-week. The outlook into the end of the year does not appear supportive for mortgages. Outside of the subprime and housing drama, there are the balance sheet constraints into yearend, poor liquidity and a pick-up in bid lists related to yearend.
Mortgage Applications Jump
Mortgage application activity surged for the week ending Nov. 30 as mortgage rates dropped to their lowest level in almost two years. The Mortgage Bankers Association reported that the Refinance Index surged 31.9% to 2761.3 from a revised, seasonally adjusted 2093.0. This is the highest the index has been since the week ending July 1, 2005, when it was at 2788.2. A year ago, the index was at 1990 with 30-year fixed rates at 6.14%. For the month of November, the Refinance Index averaged 2343.0, up 12% from October's average. At the same time, 30-year fixed mortgage rates averaged 6.20% compared to 6.35% in the previous month.
Meanwhile, the Purchase Index also jumped 15.2% to 464.3 from a revised 403.2. A year ago, the index stood at 427. Regarding the revisions made for the week ending Nov. 23, the MBA said there was an error by one of the larger reporting companies.
As a percent of total applications, refinancings were 56%, up from 51.4% previously. This is the highest refinancings have been since early April 2004, when they were at 57.1%. ARM share declined to 11.6% from 14.6%. ARM share is at its lowest since early March 2003.
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