Market Analysis

Bonds improved during the day yesterday on investor jitters on the August Philadelphia Fed Business Outlook Survey which swung from a positive 5.1 in July to a negative 7.7 in August.  A value above 0 signals expansion and below 0 signals contraction.  Mortgage-backed securities (MBS) issued by Fannie Mae and Freddie Mac are slightly negative (price and rate have an inverse relationship) this morning and US Treasuries are flat.  The spread between US Treasuries and the MBS continues to widen as does the spread between the MBS rates and the final interest rates consumers pay.  This is primarily due to the significantly higher cost required to originate and close loans due to underwriting standards that require the collection, processing and review of significantly more paperwork and the costs for complying with new regulations that went into effect in January.  These costs are only expected to rise as the several thousand page Dodd-Frank bill is interpreted by regulators and implemented. 

Returning to the Philadelphia Fed report, this monthly survey questions manufacturing purchasing managers conducting business around the tri-state area of Pennsylvania, New Jersey and Delaware about their outlook on things such as employment, new orders, shipments, inventories and prices paid. Answers are given in the form of "better", "worse" or "same" as the previous month.  The manufacturing sector had been one of the bright spots on the economic landscape, as on a monthly basis improvement could be seen across a broad spectrum of manufacturing metrices and across most regions of the country.  The Philadelphia report not just declining, but turning negative, was significant and further reports on this sector will be watched carefully.