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Market Commentary – 4/1/16

Each new first week of the month brings us the U.S. jobs report, and this week brings good news.  New job creations came in a touch above expectations with 215,000 jobs created in March, above the 200,000 expected.

Within the report, the unemployment rate rose to 5% from 4.9%, the U6 number was 9.8% from 9.7%, and the Labor Force Participation Rate (LFPR) rose to 63% for the first time in two years.  The uptick in both unemployment and LFPR was a result of more people entering the labor force, but unable to find a job.

On a macro level, experts are debating how long can the U.S. be insulated from and continue to outperform the rest of the world.  The resiliency of the U.S. consumer and economy is second-to-none, but, in our highly interconnected world, it’s plausible to think the U.S. could experience some road bumps later in the year.  It’s open to debate how bonds and interest rates will react. There are also questions as to which tools the world’s central bankers can use to effectively stimulate the global economy.

U.S. bonds continued to trade well this week as seen by the 10-year treasury note current yield, currently <1.800%.  Technically, 30-year mortgage bonds are trading at resistance levels and we would not be surprised if interest rates moved higher in the U.S. given the ongoing positive economic data we’re seeing.

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Market Commentary – 3/18/16

The Federal Reserve dialed back its outlook on the economy this past week and stated that they are unlikely to raise interest rates more than twice in 2016. Short-term interest rates were left untouched, which stoked the stock market and also led to lower yields on both the 2- and 10-year Treasury notes.

The challenge for the Fed is trying to balance these disparate elements: an anemic economic recovery, an improving job market (though with not much wage growth), and the ongoing global economic uncertainty.

With the stock market experiencing several good weeks of trading, the fear of a recession has diminished. Low-to-negative interest rates have further increased risk-taking. The 10-year Treasury note continues to trade well below 2.00% at 1.890%.

Technically, mortgage bonds continue to trade against resistance and we are biased towards floating interest rates at these levels. We are vigilantly watching the 2-year and 10-year Treasury note in the event that interest rates suddenly rise.

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Market Commentary – 3/11/16

U.S. bonds yields continue to rise in response to positive economic data coming out of the U.S. along with a reinvigorated stock market and rallying oil. The 10-year U.S. Treasury yield, which is the benchmark for bonds, is now near 2% as global economic fears have subsided.

There was not much in terms of economic reporting this week. The big news came out of the European Central Bank (ECB), which announced increased economic stimulus to fend off deflation and to spur their economy.

All eyes will be on the Federal Reserve next week and on the outcome from the Federal Open Market Committee’s meeting. The feeling is the comments out of the Fed meeting will be hawkish, which is bad for bonds.

Technically, we are advising with caution to float interest rates and we are monitoring the 10-year note carefully to see if it edges beyond the psychological 2.00% barrier.

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Market Commentary – 3/4/16

All eyes were on the February jobs report which came in better than expected this morning: 242,00 new jobs were created versus 190,000 expected. Unemployment remained under 4.90%. This overall positive employment report included a revision of 30,000 more jobs created in December and January put pressure on bond yields. With both the stock market and oil trading well again this week, mortgage interest rates responded by moving higher.

The positive jobs report coupled with a significant comeback in global equities has left the door cracked open for an additional Fed rate hike later this month. It is anyone’s guess what will happen, but the odds are increasing that a rate hike this year may be put back on the table.

Technically speaking, bonds have traded poorly, and we remain biased toward locking in loans with the 10-year U.S. Treasury note still trading well below 2.00%.

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Market Commentary – 2/26/16

U.S. bonds are not having a particularly good day after a better-than-expected Personal Consumption Expenditures (PCE) reading, which excludes volatile food and energy. The PCE year-over-year reading came in at 1.70% which is approaching the Federal Reserve’s 2% inflation target.

Rising inflation indices are bad for bond yields and as expected, the U.S. bond market is responding with rising interest rates. Adding further pressure to bond yields was a poor 7-year U.S. Treasury Note auction which was met with tepid demand.

Other economic news Friday morning included the second reading of Q4 2015 GDP. This reading came in a bit better than initially stated with an upward revision to 1%.

Oil and stocks have had a good trading week and this is also adding pressure on interest rates. As money flows back into the equities markets and other “risk on” trades, interest rate yields tend to suffer.

Based on the current market conditions, we are biased toward floating interest rates as prices remain above technical support levels. However, we continue to float with caution.

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Market Commentary – 2/19/16

insignia_sideBonds are trading decently this Friday morning even with a better-than-expected January Consumer Price Index and Core CPI readings, which strips out volatile food and energy. Stocks rallied hard this week and bond yields climbed mildly after a brutal couple of weeks of trading. U.S. employment readings remain positive despite concerns over oil, China, and worries of a potential global recession.

Technically, mortgage bonds continue to trade just above support levels. With the 10-year U.S Treasury note trading near 1.76%, interest rates remain extremely attractive and we continue to remain biased toward locking in interest rates at these low yield levels.

Market Commentary – 2/11/16

falling-ratesFalling interest rates around the globe as of Thursday, February 11th, 2016.

U.S.                       Germany             Japan                   Switzerland

1.70%                   .19%                     .01%                     -.31%

Rising volatility in stocks, currencies and commodities have greatly benefited bond yields. The yield on the 10-year U.S. Treasury note, a benchmark for everything from mortgage rates to corporate lending, fell just below 1.60% this week, its lowest level in over a year.  The two-year U.S. Treasury-note yields, a widely watched gauge of bank funding costs, also dropped significantly.  Too much of a good thing can be worrisome, and folks are concerned about the factors that are driving down interest rates.  The precipitous drop in global interest rates prompted Congress to question Fed Chair Janet Yellen regarding the potential adverse effects negative interest rates may have on the U.S. economy.

Yields are compressed and bank stocks have been under tremendous selling pressure lately due to various factors including concerns over oil related debt as well as zombie Euro-zone loans.  The added yield squeeze is also eating into banks’ profits.

Friday brought some positive news after a brutal week for global equities.  Oil and equities rallied early Friday and the European and U.S. equity markets also posted strong gains.  A strong retail report for January brought welcomed good news.

With interest rates hovering near historical lows, we remain biased toward locking in loans at these levels. Technically, bonds are overbought and a strong possibility remains for a reversal or sell off in bonds, which may yield higher interest rates.  Our mantra remains “a bird in the hand is worth two in the bush” when it comes to interest rates at these low levels.

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Market Commentary – 2/5/16

Blog-bondsIt’s anyone’s guess how low bond yields can go with short-term government-guaranteed European and Japanese debt offering negative yields. The idea of a negative interest rate is probably something that none of us thought was possible. Bill Gross, the famed bond manager, seems to feel that something will have to give, saying, “In recent weeks markets have witnessed Mario Draghi of the European Central Bank (ECB) speak to ‘no limit’ to how low Euroland yields could be pushed – as if he were a two-time Texas Hold’em poker champion.” He then noted that in turn, Janet Yellen halted the Fed’s well-advertised tightening cycle at 25 basis points, at least temporarily, followed a few days later her counterpart at the Bank of Japan, Haruhiko Kuroda, decided to enter the “black hole of negative interest rates much like the ECB and three other European central banks.”

Domestically, U.S. bonds have benefited from these central bank policies with the 10-year Treasury trading around 1.84% as of Friday afternoon (2/5/16). A mixed job report further benefitted mortgage bonds this morning. The jobs report for January came in at less than 40,000 than predicted. However, the jobless rate did fall to less than 5%. Volatility in various sectors including global equities, the oil patch and loans made to the oil industry all continue to weigh on the market as well. These factors too are helping to push yields lower.

Though rate increases are on the horizon, experts believe the Fed will hike rates no more than four times in 2016.

Technically, bonds are overbought, and we remain biased toward locking in interest rates with yields at these levels.

Alt-A Loans Get New Respect

ALT-A-loansAs a mortgage broker specializing in complex jumbo loans in California, I read with interest the article from the  Wall Street Journal on “Alt-A” loans (Remember ‘Liar Loans’? Wall Street Pushes a Twist on the Crisis-Era Mortgage, February 2, 2016). I took this as a sign of encouragement for the many self-employed borrowers with sporadic income, or less than perfect credit.

These borrowers have had little success obtaining financing from large banks, even when putting down payments of over 40%! Today’s “non-qualified mortgages” do not resemble the “liar loans” of the past. These days, both borrowers and lenders must invest more effort analyzing complicated loan terms that are structured to compensate for factors such as unpredictable income, or lower credit scores.

We at Insignia Mortgage have built strong relationships with regional California-based lenders who will underwrite these types of loans, often offering very favorable interest rates (example: 5-year fixed 3.218% to 3.718% APR). This WSJ article reinforces the ideas that investors are starting to realize these loans are not all bad. Wall Street certainly seems to be warming up to these loans.