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The ten-year bond is the basis for all mortgage pricing
Long-term interest rates are priced off the benchmark long-term bond, which is the ten-year Treasury. These days, the ten-year bond reacts to economic data through the Federal Reserve’s asset purchase program, also known as quantitative easing (QE). As a general rule, economic data that shows weakness is bond bullish (positive). However, data that shows strength isn’t necessarily bond bearish (negative).
The week in review
Last week was pretty dull as far as market-moving data. The only report that had the possibility of moving the market was the ISM (Institute for Supply Management) Services Report on Monday, which showed the service sector is expanding well. On Tuesday, the IBD/TIPP Economic Optimism report showed a drop in economic optimism. Also on Tuesday, the JOLT Job Opening Report showed job openings were flat in July. On Wednesday, the Fed released its Consumer Credit report, which showed credit increased by $13.8 billion—lower than the $15 billion estimate. On Thursday, initial jobless claims came in as expected, and on Friday, the Mortgage Bankers Association showed delinquencies and foreclosures are still dropping.
Implications for mortgage REITs
Mortgage REITs, like Annaly (NLY) and American Capital (AGNC), are driven by interest rates. The mortgage REITs have been crushed as the ten-year bond has sold off, but they’ve been trying to form a bottom here. For REITs, it’s all about the Fed’s exit of QE. Annaly announced earnings last week, which were more or less in line with everyone else, with the exception that it had less leverage than most.
Implications for homebuilders
Homebuilders, like Lennar (LEN), KB Home (KBH), and Standard Pacific (SPF), are more sensitive to general economic strength. The strong ISM report showed the service sector is doing well, which was good to see. But the JOLT Job Opening Report showed that job growth is still hard to come by.
Continue to Part 6: Preview of the upcoming week
More From Market Realist
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- Government mortgage-backed securities rally in anticipation of more quantitative easing
- A puzzle in mortgage rates
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