What happened last week?

Mortgage backed securities (MBS) gained +131 basis points from last Friday's close which caused 30 year fixed rates to move lower. This marks the second straight week of over +100 BPS gains in the benchmark mortgage backed security and therefor, lower mortgage rates.

We started the week off with a rally as MBS climbed off of their lows after Retail Sales came in much lower than market expectations. Bonds generally rally (better rates for you) on weaker economic data.

But it was another week that focused on Fed Chairman Ben Bernanke. Bernanke testified before the House and Senate last week as part of his semi-annual monetary policy report. As we have been discussing for some time, traders are very focused on the timing of when the Federal Reserve will begin to reduce the amount of monthly Treasury and MBS bond purchases. MBS rallied as traders speculated that Bernanke's most recent comments pointed to the Fed waiting longer to "taper" their monthly purchases. The prior speculation was that this tapering would begin in September.

The change in trader sentiment is due to Bernanke's comments that tapering will occur once the economic data (with particular focus on the labor market) shows enough of an improvement and traders currently do not perceive that there is enough economic improvement yet and so, their projections on the timing of the tapering is shifting for later down the road. Of course, this sentiment among traders could change next week.

MBS also received renewed interest from foreign investors as concerns mounted about Italy and Greece being able to meet their latest round of bailout requirements.

From a technical perspective, we closed above the 25 day moving average on Friday for the first time since April.

 

What is on the agenda for this week?

Date	Time (ET)	Economic Release	Actual	Market Expects	Prior
22-Jul	10:00 AM	Existing Home Sales	-	5.28M	5.18M
23-Jul	9:00 AM	FHFA Housing Price Index	-	NA	0.70%
24-Jul	7:00 AM	MBA Mortgage Index	-	NA	NA
24-Jul	10:00 AM	New Home Sales	-	481K	476K
24-Jul	10:30 AM	Crude Inventories	-	NA	-6.902M
25-Jul	8:30 AM	Initial Claims	-	328K	334K
25-Jul	8:30 AM	Continuing Claims	-	2990K	3114K
25-Jul	8:30 AM	Durable Orders	-	1.50%	3.70%
25-Jul	8:30 AM	Durable Goods -ex transportation	-	0.40%	0.50%
25-Jul	10:30 AM	Natural Gas Inventories	-	NA	58 bcf
26-Jul	9:55 AM	Michigan Sentiment - Final	-	84.2	83.9

A week without Bernanke? What will we ever do?

The bond market will get a breather from all-Bernanke-all-the-time. The biggest reports of the week will be Initial Jobless Claims and Durable Goods Orders. Last month, MBS sold off sharply (worse rates for you) in direct reaction to a very strong reading in Durable Goods. So, a variance from market expectations can really move your pricing.

We do have three U.S. Treasury auctions this week:
07/23 - 2 year note
07/24 - 5 year note
07/25 - 7 year note - most important of the three