I would like to thank my friend, Christine Chaplin with RBC Centura Bank for this post, it's both accurate and informative.  At Carolina Realty Group, we focus on the truth, but always hope for the best.  If anyone has questions on this commentary, please reply to the post or contact Christine directly at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

"You dropped a bomb on me baby"...The Gap Band.  And boy, what a bomb it was.  Yesterday, Mortgage Bonds had their worst one-day performance since October, losing an astounding 206bp.  So?what the heck happened and what's next?
The main culprit for yesterday's selloff...SUPPLY.  The Treasury has literally been printing money by way of Treasury auctions to pay for the massive spending.  And these hundreds of Billions of dollars of new Bond supply have to be absorbed by the market so the additional supply literally weighs on the entire Bond market and drags prices lower.  Also, when you think of SUPPLY, consider we have all been doing tons of refinances and all those loans have been bundled, packaged and sold on Wall Street...and this additional SUPPLY has now started to hit the secondary market, as those closed loans are now getting turned around and sold.  This supply also must be absorbed, and while the Fed has been a buyer, they simply can’t buy enough to balance all the selling.  It’s Economics 101 anytime supply vastly exceeds demand, prices will move lower.  And as prices move lower, yields rise with that rise in yield  attracting new buyers as they get a higher return on their investment.  This is how the market finds balance.
Many governments have made attempts to support a currency.  In other words, a country individually, or a group of countries, can join together to purchase a nations currency in an effort to prop it up or support it.  A historical perspective indicates that this may work as a temporary fix, but never works over the long term.  In some ways, we can draw parallels to what the Fed is attempting to do with mortgage rates.  As you know, we have been quite vocal on how a 4% mortgage rate was a myth, and it appears now that some clients who elected to hold out for that rate find themselves in a tough spot.
After losing a staggering 363bp since last Thursday, Mortgage Bonds are bouncing higher this morning.  We’ve issued four Alerts to Lock over the past ten days ahead of these losses, so hopefully most of your pipeline has been protected.  But the question on everyone’s mind is will rates come back?  The answer is that we will probably see some improvement, but it will be difficult to see rates fight back to the levels they were at just last week.  There are both fundamental and technical reasons why a retracement back to last week’s levels would not be easy.  Fundamentally, the aforementioned supply issue still exists, with no end in sight to the amount of debt still to be issued and the printing presses are just getting started, and the Fed now has to almost endlessly push sales of Bills, Notes and Bonds to raise the capital needed to continue to spend.  Yes, the Fed will continue to buy Mortgage Bonds, which will help to some degree but put your traders cap on for a minute, and think about this.  If you were a trader, and saw that US Treasury yields were moving up, up, up making them more attractive and Mortgage yields were moving lower, you would be tempted to sell your Mortgage Bonds and buy Treasuries.  This is precisely why the Fed announced that they will be buying $300B in Treasuries in addition to the Mortgage Bonds to protect against this.  But it’s like trying to clean up a flood with a sponge.
Moreover buying long term Treasuries at the same time they are trying to sell them has got to make you wonder who came up with this bonehead idea?  Especially since the Fed’s efforts should have been to sell as much long term paper as possible, when they could have locked in paying rates of 2%!  You almost wonder why the government chooses not to act like a normal rational consumer or homeowner would.  It makes no sense whatsoever.  Would you advise your clients to pass up a 2% rate on a 30 year fixed loan, and opt for a 1% rate on a six month ARM with no caps on future rate increases when they are planning to remain in the home forever?  This is exactly what the government is deciding to do.
Economic news headlines are taking a bit of a backseat this morning, but Initial Jobless Claims fell by 13,000 to 623,000, better than expectations of 628,000, but a higher revision to the prior week's reading offset the slightly positive headline number.  Durable Goods Orders in April came in at 1.9%, a bit better than expectations of 0.5% and up from a revised -2.1% in March.  Excluding transportation, orders were up 0.8% in April, after having fallen 2.7% in March.  Stocks and Bonds did not react much to these items as they both try and stabilize after yesterday's wild selloff.
More news from the housing sector, as New home Sales were reported at 352K, just under consensus estimates of 360K.  Last month’s numbers were revised just slightly lower, down to 351K from a previously reported 356K.  Inventory is moving lower, showing a 10.1 month supply, down from 10.7 last month.
A look at how the mortgage market is performing is not that great.  Delinquency rates for prime, subprime and overall are hitting record levels with almost 8% of loans currently delinquent.  This does not count loans in foreclosure, which represent about 3% of all loans ? so add them up, and the combined percentage of loans not current is more than 11%...that’s a big number.  This should continue to weigh on the housing markets, as properties already in foreclosure or about to hit foreclosure will compete with any new listings.  A further breakdown shows that 5% of prime or A-paper mortgages are delinquent, while a whopping 22% of subprime loans are past due.  Once again, this does not take into account those who have already gone into foreclosure.
As the economy eventually improves and the important jobs picture also begins to get better, this presently ugly delinquency situation should start to turn around.  But that will take some time, which will likely mean more pain, especially in the states hardest hit by real estate price declines, such as California, Florida, Nevada and Arizona; as well as those hit hard economically like Michigan and Ohio.
The recent price declines have pushed Bonds into an "oversold" state, which means prices could be ripe for a bounce or reversal higher, yet we need to be mindful of a few things.  After a few bad days, we have fallen through several floors of support, which now become overhead resistance.  Additionally, should the Bond start to move lower again, the next clear floor of support lies at the 200-day Moving Average, still a sizable 100bp beneath current levels.
We can now carefully Float to see if Bonds regain some footing ? but with caution, as another $26B worth of 7-year Notes are due to be auctioned off at 1pm ET today, which could spark another round of volatility.  And speaking of auctions, lots of long term paper will be hitting the market during the second week of June so strap on your seatbelts.