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Rates continue to drop lower as the 10 yr Treasury slides. Yields are Lower - Driving Mortgage Rates Lower. 30 Year Fixed Rate - 4.25% 15 Year Fixed Rate - 3.75% 40 Year Fixed Rate - 4.75% 20 Year Fixed Rate - 4.25% 10 Year Fixed Rate - 3.75% 3/1 & 5/1 ARM - 3.25% 7/1 ARM - 3.50% Employment Data Below Forecast A slow economic recovery and the possibility of a Fed policy change helped mortgage rates move a little lower again this week. As a result of recent weak economic data, the Fed is reportedly considering the purchase of additional mortgage-backed securities (MBS) to replace maturing securities. These factors, along with limited inflation, make current economic conditions supportive of low mortgage rates. In particular, Friday's weaker than expected Employment data was positive for mortgage rates. Against a consensus forecast for a loss of -90K jobs, the economy lost -131K jobs in July. This included the loss of -143K census positions. Private employers added 71K jobs, below expectations of 100K. The Unemployment Rate remained at 9.5%. Average Hourly Earnings, a proxy for wage growth, rose at a tame 1.8% annual rate. To stimulate the economy, the Fed purchased $1.25 trillion in mortgage-backed securities (MBS) in 2009 and early 2010. Due to defaults, refinancings, and maturities, some MBS "roll off" the Fed's portfolio every month. Until recently, investors expected the Fed to let its portfolio slowly shrink in this fashion. Tuesday, though, a Wall Street Journal article suggested that Fed officials are considering a plan to replace those securities with new purchases to further stimulate the economy. Investors are divided about whether recent economic data has been weak enough for the Fed to decide to do this. It may be addressed at the August 10 FOMC meeting. While the demand created by this action would be small compared to the original MBS purchase program, it would further support low mortgage rates. Friday’s bond market has opened in positive territory after this morning’s important economic news gave us somewhat favorable results. The stock markets have reacted negatively to the data, pushing the Dow down 117 points and the Nasdaq down 33 points. The bond market is currently up 13/32, which should improve this morning’s mortgage rates by approximately .125 - .250 of a discount point. Market Commentary
Friday morning’s data came from the Labor Department, who reported that the U.S. unemployment rate held at 9.5% last month and that 131,000 jobs were lost. The unemployment rate was expected to rise to 9.6%, so the news was not all great for the bond market. But analysts were expecting to see that the economy lost only 85,000 jobs. In addition, today’s report also revised June’s payroll loss higher by nearly 100,000, meaning June was much worse than previously thought. The larger than expected loss in payrolls and the sizable revision to June’s numbers have led to today’s solid open in bonds.
In a bit of bad news for bonds, it was also reported that average earnings were revised higher for June and rose 0.2% last month when they were expected to rise only 0.1%. The bond market does not like to see rising income because it raises concerns about wage inflation and gives consumers more funds to spend that fuels economic activity. However, that reading was not enough to erase the positive tone for bonds this morning.
The benchmark 10-year Treasury Note has broken below the pesky 2.90% that was a strong resistance point. This fact, along with the appearance that stocks may continue to fall today, leads me to believe we may see more improvements to mortgage rates this afternoon. While this is no guarantee, the indicators do point that direction in my opinion.
Next week will be a busy week for the bond market and mortgage rates with a few important economic reports, two relevant Treasury auctions and another FOMC meeting all on tap. The most important economic data comes late in the week and there is nothing of concern due Monday.
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