Traveling across the globe gets tiring after a while, and getting back early in the morning certainly doesn’t help the situation.  Mortgage backed securities appear to be tired of the current situation as well, unable to rally further and mortgage rates ended the week slightly higher as a result.

Last week saw a bit of a correction as was expected, offering a brief chance to float for a lower rate.  There wasn’t a lot of data plays, though Retail Sales didn’t assist mortgage bonds’ attempts to rally by beating expectations, and doing so dramatically.  It is certainly too early to call it a reversal, but it did open some eyes to say the least.  The majority of the week played to the media’s coverage of the upcoming stimulus package.  As the week drew to a close on a shortened trading day, bonds’ succumbed to pressures and fell back, failing to break through tough resistance at their 50-day moving average.

As for the stimulus package, it keeps going back and forth between the House and Senate.  In the House, there has not been one Republican to vote for it yet.  Even in the Senate, the Republicans have not been overly happy with the outcome as they believe it is overspending and will not stimulate the economy the way it is intended to.  With 1,071 pages, along with the speed at which the vote is going, it is inevitable that “agendas” will get pushed through and the best things about the program will get cut out, or minimized.  One case in point is the first-time homebuyers credit, which has been reduced from $15,000 to $8,000.  The bill has yet to pass, and Obama’s administration is already looking for new ways to provide handouts to those potentially facing foreclosure, so more harm is one the way. 

Enough politics, let’s get down to business for this week.  The week starts off dead, at least with the markets closed and that may very well be a good thing.  Unlike last week, we will have more than one major player regarding data.  We will see the Fed “unplugged”, as well as data plays on the economy and inflation with the week ending with the CPI report.  here is the breakdown…

• Monday:  President’s Day – markets closed, Fed Gov Duke Speech (09:40)
• Tuesday:  Empire State Index (8:30), Housing Market Index (1:00), 3-mo T-Bill Auction (1:00), 6-mo T-Bill Auction (1:00)
• Wednesday:  MBA Purchase Applications (7:00), Housing Starts (8:30), Import/Export Prices (8:30), G.17 Statistical Release (9:15), Crude Inventories (10:30), Bernanke Speech (1:00), (4-week T-Bill Auction (1:00), FOMC Minutes (2:00)
• Thursday:  Jobless Claims (8:30), PPI (8:30), LEI (10:00), Philadelphia Fed Index (10:00), Money Supply (4:30)
• Friday:  CPI (8:30)

As you can see, as the week progresses, we will be seeing opportunities for mortgage bonds to rally, or get beaten down.  Data tends to move the markets at times opposite of what the charts indicate, but so far the charts have been correctly identifying the current trend.  Looking at the charts, we see that bonds remain trapped below their 50-day moving average, despite the government talk about lower mortgage rates.  Part of the reason mortgage rates haven’t gone down further, even with the Fed buying MBS every week, is the Fed is buying the higher coupon bonds in general and basically continue to keep rates from spiking higher rather than driving them lower.

As we look to what will happen this week in regards to mortgage rates, without government intervention or some major surprise in the markets, mortgage bonds look to fall further as they will likely test support, and that is verified by a negative stochastic crossover and their fall below their 10-day moving average.  Expect mortgage rates to tick higher this week.

I was chatting this morning with a buddy of mine, Mark Green, the guy behind Top of Mind Networks about social media and a recent conversation he had with Brian Brady. Like many of us out there, Mark is new to social media and has been trying to navigate the divide between how to effectively use social media to drive sales and build relationships and using time for more traditional marketing vehicles.

It turns out that Brian was nice enough to give Mark an hour or two of his time and walked Mark through how he uses social media effectively day to day.

Now Mark and Brian are teaming up to put on a FREE webinar where Brian will share how he uses social media as communication and business building tools. Awesome! I consider this a must see… check it out.

YOU CAN SIGN UP FREE HERE!

During this 45-minute session Brian Brady will explain: 1)  The ultimate goal of social networking 2)  How to extend your “sphere of influence” online 3)  What’s the “favor bank” and how to put it to use 4)  How to monetize your social networking efforts PLEASE register early, mark your calendar, and be on time.  We’ll begin at exactly 1pm EST (10am PST).

As I have mentioned many times before, the only way we could get mortgage rates down this low was with the Fed buying up mortgage backed securities and creating an artificially inflated market, aka the “mortgage rate bubble”.  They have been the creators of the bubbles in the past through their actions, so why should this one be any different?

Well, the headlines not too long ago stated that Paulson and Bernanke wanted mortgage rates to be as low as 4.5%, some mortgage originators even developed their own agenda of 3.5% mortgage rates as another bait and switch advertising campaign.  But reality is quite different and the Fed knows that.  Or do they?  We can see what their MBS purchase pattern looks like and you can see they are not trying to drive mortgage rates down at all right now.  In fact, it looks more like they are trying to keep mortgage rates from spiking higher, bringing into question whether or not they are already realizing that mortgage rates are headed higher and likely quickly, so they need to dampen that burden on the economy.

Here is a chart I did that shows their actions each week, allowing you to see where their purchasing concentration is.  Click on the picture to get the full sized graph.

As you can see, the Fed was buying mortgage backed securities with lower coupon rates in the beginning.  They are still concentrating their purchases of Freddie Mac mortgage bonds in the lower coupon rates, but even here they have crept away from the 4.0 and only last week dropped back into the 4.5% MBS.  The Fannie Mae purchases are quite different, however.  The Fed’s focus on Fannie Mae mortgage bonds has drifted, and stayed in the higher coupon ranges, namely the 5.5% coupon and bleeding into the 6.0% MBS last week.

So what does this all mean?  In all likelihood, the Feds are expecting mortgage backed securities market pressure to drive mortgage rates higher.  In fact, they may even be concerned about their actions turning into inflation down the road and the market reaction to that fact.  That means they have little power to drive mortgage rates lower and the best they can do is to maintain mortgage rates, or more realistically, keep mortgage rates from spiking. 

With the shift of the purchases towards the higher coupon bonds, one of two things are taking place.  They likely are attempting to maintain stability in the markets as much as possible.  The other possibility is, in my opinion, a little less likely, that is they are purchasing higher coupon rates because those loans are likely to get refinanced and paid, thus allowing them to recoup their investment fairly quickly.  With the Fed playing with “fake” money, aka printing new money to build their balance sheet (Bernanke favors this tactic to create inflation), I doubt this is what they are focused on, not to mention that it is a gamble they may not pay off.

Decide what you may, but the reality is the Fed is not going to drive mortgage rates lower through the purchase of mortgage backed securities.  That means, all those people out there looking to refinance or even purchase homes at the lowest mortgage rates already missed the boat.