FYI re Pricing IncreasesSpecial Report
03/24/2010
Pricing Deterioration - Why?
As of 3:30EST, FNMA MBS 4.5 percent coupons have lost -69BPS. Of course, the natural question is why?
The decline is due to three primary reasons:
1.) Health Care. The long-bond buyers are very, very concerned about this. Please read the following with the understanding that we are not making a statement if people should have health care run/provided by the government. The foreign investors that purchase our long term debt in the form of Treasuries and MBS, we are looking at this from a purely inflationary viewpoint.
No matter how you slice it, this is the biggest deficit machine that has been created in the last 60 years. Yes, the CBO says that this new health care plan will reduce the deficit but that is not accurate. You need to understand that the CBO is prohibited from doing any analysis nor are they allowed to use their own input. Simply put, they are forced and required to crunch the numbers based upon the formula that is given to them by Congress. For example, as a mortgage professional you would tell them "please calculate my profits based upon my company growing at 35 percent per year, an average of 3 points front and back and by overhead shrinking by 20 percent each year."
They would give you a number. But anyone else (say a CPA) would point out that it is not reasonable to have that kind of growth, nor to make that much per loan, and your overhead will actually increase each year. The CBO cannot not do that.
So voting with their dollars, investors in the global financial markets look at this and say...this will make the United States current debt service and future deficits grow and grow and grow. This health care deal is horrible in terms of what it will do to our deficits and inflation.
2.) The Federal Reserve Bank of New York will end their $1.25 trillion Agency Purchase program in just 5 business days. We have been stating since the end of February that we felt that MBS pricing needed to adjust downward another 50 to 100 basis points. Prior to yesterday, we really hadn't seen any adjustments for this.
3.) China. To put it bluntly - we have done some things over the past several days that have pissed them off and they are pulling back on their Treasury and MBS purchases. These events include: Claiming that their currency isn't valued correctly, Google pulling out, and saber rattling over a trade war. Not a great idea to upset the country that holds so much of our debt.
So, now you are thinking....How far will pricing fall? Will it bounce back? Take a look at the FNMA 4.5 percent chart:
We have broken through the 200 day moving average which is typically the very last technical support layer. Without this safety net their is nothing below it to stop the free fall.
So, we have to look at the FNMA 5.0 percent coupon and we find our answer:
The 5.0 percent coupon has a 200 day moving average as a support level that is -34BPS lower (worse) than our current trading position. That could be our new safety net, we will know for sure by Friday.
We think that it is important to note that we advised our subscribers to lock in their loans at 8:45 EST in our Morning Coffee Update. We issued an alert to lock at 9:15EST and then issued several more throughout the day. MBSauthoriy has been way ahead of the repricing today.
This Special Report is only to be used for the sole and private use of our subscribers and not to be redistributed in whole or in part without our express written consent. Our data, analysis and commentaries are intended only for mortgage professionals that have been trained by MBSauthority on our systems and not for Realtors or consumers. It may not be distributed in blogs or other forms of electronic distribution.
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