MONDAY JUNE 29, 2009

Mortgage Market Commentary

Mortgage backed securities (MBS) prices continue to trade higher (rates lower) as signs emerged that foreign buyers are scooping up record amounts of U.S. debt speculating the economy's recovery may be slow; FNMA 5.0% coupon 101.89bps, +6bps & FNMA 4.5% coupon 99.83bps, +6bps. MBS rallied last week as indirect bidders purchased 67% of the record $27 billion in 7yr notes, double the amount at the last sale. The 5yr note sale drew the highest demand since 2004 and the 2yr note sale attracted the most demand in six years. The U.S. relies on foreign central banks to finance the huge federal deficit, with over 50% of the $6.45 trillion in marketable securities held outside the U.S., up from 35% in 2000, with China holding $764 billion. The Treasury will resume debt sales on July 6 with an auction of 10yr Treasury Inflation Protected Securities (TIPS) then will sell 3yr, 10yr & 30yr debt July 7-9. The Fed is scheduled to purchase Treasuries tomorrow and July 1, part of the central banks plan to lower consumer borrowing costs. Yields have fallen in parts of the credit markets as the 3mo LIBOR is at a record low 0.597%, 35bps above the upper range for Fed funds & the least in 15 months. Mortgage rates have risen, potentially delaying a rebound in the housing market as central bankers have indicated they accept the rising yields as long as they reflect expectations for an economic recovery. However, further increases may put such an outcome in jeopardy. Home sales, the engine that has powered every U.S. recovery since 1960, have stalled due to stricter qualifying rules and rising rates. The $8,000 first time homebuyers tax credit and a government program to subsidize some mortgage payments have had little effect. Mortgage lending is at a 13 year low and the 3.8 million homes for sale (2.1 million unoccupied) does not help the situation. At the current pace it would take 9.6 months to unload them all, while the 5yr historical average is 3.6 months. More than 20% of all homes in U.S. are under water or worth less than their loans. Crude oil advanced to $70.41 a barrel and is poised for a 42% quarterly gain, 57% this year on increasing optimism the economic slump will be ending soon. While the economic slump tempers global demand growth, it may also cause supply to shrink as lower exploration and production spending delays projects and reduces spare capacity. There are no economic reports due out today.

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