We have a world class secondary market department and they are kind enough to send out weekly updates to us sales monkeys. I like posting it as it is both a great source of technical and anecdotal information. Please let me know your thoughts!
The Week Ahead in the Capital Markets - November 13, 2007
“Your eyes do not deceive you. Treasury yields plummeted last week, and mortgage rates barely budged. In fact, mortgage rates rose 0.30% relative to duration-equivalent Treasuries. The spread between mortgages and Treasuries eclipsed 2.00% for the first time in years. Back in 2002, mortgages traded 2.50% over the curve for a brief period. For much of 2004, 2005, and 2006 the spread was 1.25%.
It is not a coincidence that spreads are wide today like they were in 2002 and 2003. Then, as now, the Fed was in a rate cutting mode and there was great uncertainty as to the future of interest rates. When such uncertainty exists, buyers of mortgages demand a greater relative yield to compensate for prepayment risk. Hence the wide mortgage-to-Treasury spreads.
So what will it take to narrow the spread? Some certainty about interest rates. If the Fed stops cutting rates sometime next year, and signals that they intend to leave rates alone for some time, it is very likely that mortgage-to-Treasury spreads will come down.
In the meantime, short-term rates are very volatile. Fed funds futures pushed to levels not seen in some time – August 2008 futures traded down to 3.67% on fears of economic slowdown. There is only a 50% chance for a rate cut in December, but after that, significant cuts are built in. Also the yield curve steepened +0.80%, a level not seen since early 2005. Recall that the difference between two-year and ten-year Treasuries was -0.10% only a year ago.
As for credit spreads, core jumbo prices held in last week, although we saw several price hits worsened for high-CLTV loans. Fannie Mae also announced price adjustments that will affect core agency loans in the high-LTV, low-FICO bands. The move by Fannie Mae was significant – It was the first such credit adjustment to their core products in many, many years.”
The writers are on strike. ... They are calling this the toughest time for comedy writing since those three weeks back in the '90s when Bill Clinton stopped dating. – (Jay Leno)
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