MARKET COMMENT
Mortgage bond prices finished the week lower which put upward pressure on rates. Rates were worse Monday and Friday mornings and generally flat in between. There was some selling pressure as stocks got a boost from reports there may be a coronavirus vaccine sooner rather than later. The data did very little to move the market as the Fed maintained their dominant MBS purchasing role. Consumer prices rose 0.6% vs the expected 0.5% increase. The core, which excludes volatile food and energy, rose 0.2% vs the expected 0.1% increase. Industrial production rose 5.4% vs 4.8%. Capacity use was 68.7% vs 68.8%. Weekly jobless claims were higher than expected. Consumer sentiment was 73.2 vs 77. Mortgage interest rates finished the week worse by approximately 1/8 to 1/4 of a discount point.
LOOKING AHEAD
| Economic Indicator | Release Date & Time | Consensus Estimate | Analysis |
| FHFA House Price Index | Wednesday, July 22, 10:00 am, et | Up 0.4% | Moderately Important. A measure of single-family house prices. Weakness may lead to lower rates. |
| Existing Home Sales | Wednesday, July 22, 10:00 am, et | 3.9M | Low importance. An indication of mortgage credit demand. Significant weakness may lead to lower rates. |
| 20-year Treasury Bond Auction | Wednesday, July 22, 1:15 pm, et | None | Important. Bonds will be auctioned. Strong demand may lead to lower mortgage rates. |
| Weekly Jobless Claims | Thursday, July 23, 8:30 am, et | 1.3M | Important. An indication of employment. Higher claims may result in lower rates. |
| 10-year Treasury TIPS Auction | Thursday, July 23, 1:15 pm, et | None | Important. TIPS will be auctioned. Strong demand may lead to lower mortgage rates. |
| New Home Sales | Friday, July 24, 10:00 am, et | 680K | Important. An indication of economic strength and credit demand. Weakness may lead to lower rates. |
AUCTIONS
US Treasury bonds do not directly dictate fixed mortgage interest rate pricing however they do have an indirect impact. Treasuries are used as a hedge for the interest rate risk associated with mortgage-backed security investing. Mortgage-backed securities have the potential for prepayment that Treasuries do not. Both Treasuries and mortgage bonds often track in the same direction, but this is not always the case. There are many times that Treasuries and mortgage bonds move inversely.
Despite the overwhelming size of the US economy, foreign investors can still influence the movement of US financial markets. When foreign economies struggle foreign investors often purchase US based investments including mortgage bonds. This demand usually causes mortgage bond prices to rise and interest rates to fall. This flight to quality buying is one of the factors that helps mortgage interest rates remain historically low. The Fed recently noted that, “Foreign economic activity contracted in the first quarter, even though most countries abroad introduced strict social-distancing measures to contain the spread of the coronavirus only toward the end of the quarter. Outside of China, indicators suggested that foreign economic activity plummeted further in the second quarter, notwithstanding some signs of improvement in May as restrictions started to ease. Inflation rates fell sharply across most foreign economies in April and May.”
The Treasury auctions this week will be important in determining the current appetite of foreign investors for dollar denominated debt securities. Demand has been generally good as of late, but auctions of different durations often vary in their results. Be alert heading into the auctions.
