Market Analysis

Mortgage rates are relatively flat today with a minor uptick in closing costs for the same rate due to weakness in the bond market in the late morning. 

In today's economic news, new unemployment claims for the week ended Sept 6 fell by 6,000 but the # of people remaining on the unemployment rolls after receiving 1 week of aid shot up by 122,000.  Chatter is beginning to appear about the potential for Fed rate cuts.  Normally one would expect the Treasury market to rally on such news.  However, with the US Government now on the hook for Fannie and Freddie's $5 Trillion of mortgage debt and with estimates of the losses on that portfolio currently ranging from $25 billion to over $300 billion, investors appear tentative to push Treasury yields much lower given that there could be a huge amount of additional borrowing by the Fed before the housing crisis is over.

What is not clear to me is why the rates on 30 year mortgages are not further closing the gap with the yield on 10 year Treasury bonds after this initial 1/2 point drop.  The closest thing I have found to an answer to that was commentary on a financial news show where a guest indicated that the terms of the "conservatorship" of Fannie and Freddie could (and should) change once we know what the real story is.  Other than that guest's opinion, I have not really heard anything that would suggest that a Fannie Mae or Freddie Mac mortgage-backed security (MBS) is not just as secure as a 10 year treasury note.  Clearly though the market does not believe that since there is still a large spread between 10 year Treasury yields at 3.6% and 30 year mortgage rates at 5.625%.  Larry Baer at Market Alert has a saying which is that "The Market is Always Right.  You and I are Some of the Time."  This is one of those times where, at least for today, the market is saying that mortgage rates on 30 year fixed loans are not moving closer to those of the 10 Year Treasury and it doesn't matter that the government has said they are going to pay for losses and, if necessary, buy new pools of MBS.