The Week Ahead in the Capital Markets
February 19, 2008
Thirty-year mortgage rates, which fell nearly 1.00% early this year and triggered a refinance boom-let, have risen by nearly as much in recent weeks. The bond market’s focus has shifted dramatically to inflation. Bond traders fear that inflation will result from the fiscal and monetary efforts being directed at the economy, and long-term rates are headed up. Odds for more rate cuts have done nothing but increase, and futures predict sub-2.00% fed funds later this year. The difference between the two-year and ten-year Treasury yields is closing in on 2.00%, making the yield curve the steepest it has been since the middle of 2004. The words of Charles Prince (Citi’s former CEO) bear repeating: “I’d be a lot smarter if the yield curve were steeper.” Bankers are starting to feel smarter, borrowing cheap and lending dear.”
AN INSIDER’S VIEW FROM THE CAPITAL MARKETS COOPERATIVE TRADING DESK:
“The mortgage market set a record last week. Mortgage rates are nearly 3.00% higher than equivalent Treasury yields. This spread hasn’t been as wide at any time in the past ten years. Bernanke’s comments to Congress, in which he signaled more rate cuts to come, tacked on another 0.20% to the already wide spread. When Greenspan worried about deflation earlier this decade, and huge rate cuts were on the horizon, the spread jumped to almost today’s level. But it collapsed in short order. Historically speaking, it is difficult to imagine spreads staying this wide for very long.
Traders are scrambling to understand the higher loan limits in the stimulus package. SIFMA, the organization that oversees mortgage-backed securities, ruled last week that loans above the $417,000 limit are not eligible for TBA pools. Translation: jumbo loans will not trade at the same prices as conforming loans, and pricing for jumbo loans is still anybody’s guess. Meanwhile, jumbo fixed loans last week improved to slightly better than three points behind their conforming brethren.” (CMC traders price, hedge, and sell $billions of mortgages for their clients, and offer a front-line perspective on the markets.)
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