Don’t Touch That Dial!

“DON’T TOUCH THAT DIAL.”That familiar broadcasting statement certainly applied to the
markets last week, as the volatility continued and the markets changed
direction quickly.

Take a look at the chart below, which shows how home loan rates
have climbed dramatically over the last several weeks. In fact, home loan
rates are at their highest levels since the Federal Reserve announced their
Mortgage Backed Security purchase plan at the end of 2008. While the chart
below is just a rough indicator of present rates that require points and fees
to be paid, it’s clear to see the dramatic climb rates have taken in recent
days.———————–

Chart: Freddie Mac 30-Yr Fixed Rates

As we’ve mentioned in recent issues of this newsletter, added
supply has been one of the main culprits behind the recent sell-off in Bonds
and corresponding climb in home loan rates. So where is that supply coming
from? First, all those refinances you’ve heard about lately are actually
turned into Mortgage Backed Securities after they’re closed, which adds more
Bonds to the market. Plus, government spending plans have to be paid for
somehow.so record levels of Treasury Securities are being auctioned off these
days. Although the Fed has a program to purchase some of these Mortgage
Bonds, the number of new Bonds simply outweighs what the Fed is able to buy –
therefore driving Bond prices lower and home loan rates higher.

There was some good news for the economy as Consumer Sentiment
came in at its highest level in 9 months, and Retail Sales were inline with
estimates, marking the biggest rebound for Retail Sales in 4 months. There
was mixed news on the Jobs front: While Initial Jobless Claims were below
estimates, continuing claims rose to 6.82 million, which is another new
record. And US exports fell to the lowest level in almost 3 years, as the US
Balance of Trade widened in April for the second month. However, US exports
should improve a bit in the coming days, as the US Dollar recently sank
against foreign currencies, which makes US goods cheaper and more attractive
to buy. The flip side of that coin however, is that since oil is Dollar
denominated, the price per barrel rises to compensate for the erosion in the
Dollar.meaning higher prices at the pump and elsewhere.

Bonds and home loan rates were able to muster up some
improvement on Thursday and Friday, helped in part by news that the Paulson
& Co. hedge fund is purchasing distressed debt and Mortgage Backed
Securities, which will help alleviate some of the supply mentioned above.
However, home loan rates still ended the week
.25% to .375% worse than where they began.

Since Bond prices
react negatively to any news of economic recovery, it’s important to work
with a knowledgeable advisor who monitors the markets every move. Let me know
if you have any questions about your situation.

WHEN IT COMES TO BROADCASTING,
CHANGE IS IN THE AIR. TUNE INTO THIS WEEK’S MORTGAGE MARKET VIEW FOR
IMPORTANT INFORMATION ON THE SWITCH TO DIGITAL TELEVISION.