Tuesday, the Fed’s surprise announcement of a new $200 billion lending facility led to a 400 plus point rally in the Dow, the biggest one day percentage gain since March 2003. The effect on mortgage rates was also favorable. The newly available funds will make it more appealing for financial institutions to borrow money from the Fed, which is expected to increase the demand for mortgage backed securities. Mortgage markets should benefit, and the spread between mortgage rates and Treasury yields narrowed significantly, reversing the trend from the prior week.
Later in the week, sentiment turned sour, however. Investors were reminded on Thursday that the problems in credit markets were not yet over. Carlyle Capital, a large hedge fund, defaulted on $16.6 billion of its debt, and the collateral was mostly mortgage backed securities. An even bigger jolt hit the markets on Friday. Bear Stearns, a major Wall Street investment bank, announced that they would receive financing to address liquidity problems. The repercussions of losses at financial institutions continued to be felt, and investors responded to the uncertainty by shifting out of the stock market and into the relative safety of fixed income investments including mortgage backed securities. Mortgage rates fell significantly during the week, reversing a similar sized rise the prior week. That said, not all areas of the mortgage market benefited equally last week. Demand for securities backed by Adjustable Rate Mortgages (ARMs) dropped sharply, and ARMs rates did not share in the declines seen in fixed rate mortgages. The Jumbo Mortgage sector experienced liquidity issues very similar to last August as sellers far out numbered buyers in this arena driving Jumbo interest rates significantly upward.
The economic data released last week was favorable for mortgage markets. Notably, the closely watched Consumer Price Index (CPI) inflation data came in much lower than expected. The core rate was still running higher than the Fed would like, but investors were prepared for worse news. In addition, the Retail Sales data fell far short of the consensus forecast. Slower economic growth typically means lower future inflation, and mortgage markets reacted positively to both economic reports.
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2 responses so far ↓
1 San Diego real estate lawyers // Mar 17, 2008 at 2:18 pm
Mark my words, either Obama or Clinton will win - and the legal changes they bring will force a more equitable distribution of wealth AND risk. First, rebuild the social safety net, shredded by decades of rightwing mismanagement. Second, better govt regulation will bring more centralized control back over the markets. As time goes on, the federal govt will reassert its rightful authority over more sectors of the economy, and we will march together into a brighter future for our children!
James B.
2 va refinance loans // Mar 19, 2008 at 1:55 pm
I don’t think that anybody truly wants bigger governement. The brutal truth involved in capitalism is that it always crrects itself. sometimes that correct takes a toll as it is right now. but eventually things will recover. people will hopefully learn the lesson and life will go on. We don’t need sweeping gov. control to fix the situation in the long term.
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