Mortgage Rates Not Moving Out of Narrow Range

Mortgage backed securities lost a little bit of ground yesterday, but nothing that would raise any concerns except what I stated yesterday – that I had wished the momentum from Friday would have carried on into yesterday. 

This morning we have had a mix bag with the reports as the April Housing Starts were a tad lighter than expected (1.172M vs est. of 1.260M) but the weakness is the overcrowded Multifamily sector. When you look at the true housing market (owner occupied single family homes), they increased by 0.4% to 835,000. Building Permits followed the same trend (1.229M vs est. of 1.271M). In regards to manufacturing, April's Industrial Production increased by 1.00%, which is over three times the market expectations and confirms that March's improvement would have been higher if not for severe weather factors on the East Coast. Capacity Utilization also improved and beat market expectations.

Crude oil still increasing after Russia and the Saudis announced thy want to extend the output cuts that OPEC instituted, extending the cuts to March 2018. Since the announcement crude has increased $3.00 after weeks of declines of $6.00.

Looking over all of the wires this morning, there isn’t anything of significance. Media and politicians focused on Trump sharing terrorist information. No Fed officials today. Former Minneapolis Fed President Narayana Kocherlakota commenting on the Fed’s desire to reduce its $4.5 trillion balance sheet, saying even if one assumes that the Fed is right to aim for a smaller balance sheet, letting it run off is the wrong way to go. The balance sheet is mostly all MBS securities, and he muses that the central bank could lose control of an important monetary policy tool: If a lot of people suddenly chose to pay, they would slash the Fed's holdings and effectively tighten policy. Refinancing or selling homes is out of the Fed’s hands and Kocherlakota Reducing assets through deliberate sales based on economic conditions would be a better approach.

No change in the 10yr this morning. The economy is improving here and in Europe, inflation is slowly increasing, and it is one month until the FOMC meeting, where markets are expecting the Fed to increase the federal funds rate again. Presently long dated rates are holding well against the backdrop of inflation, better economy and the Fed’s desire to raise interest rates.