Mortgage Market Update 4-20-20
Plans and guidelines to reopen the U.S. economy along with a report out that a new drug could treat the virus are fueling the risk-on trade today. The White House announced guidelines last night https://www.whitehouse.gov/openingamerica/ to reopen the U.S. economy in three phases in an effort to restart the world’s largest economy. State governors will have the call as to when their states will reopen.
In addition, Gilead Sciences antiviral drug remdesivir, has shown promise for the treatment of the coronavirus and is causing “rapid recoveries in fever and respiratory systems with nearly all patients discharged in less than a week” in patients at a Chicago hospital, medical site STAT reported. A treatment is a game-changer folks and would go a long way to opening up our economy to full strength.
Furthermore, Boeing announced it will be starting commercial airplane production next week. All of these positive headlines are pushing stocks sharply higher to start the day. We see 24,000 as resistance on the Dow. Let’s see how prices behave near that ceiling. All of the good news has not translated into a huge bond selloff as of yet. Both MBS and Treasuries are modestly lower and some of it has to do with the Friday safe-haven trade as many investors look to shed some risky assets heading into the uncertainty of the weekend.
The other tailwind for Bonds is the deflation caused by the coronavirus. Prices are dropping on many items and demand is down sharply. It is important to note that the present deflation and slower demand could change very quickly upon reopening parts of the economy. Meaning that tailwind to Bonds could become a headwind. There were no major economic reports released today. China saw its first negative GDP, -6.8%, in 40 years. This number might have even been worse – who knows.
Oil prices continue to decline due to an enormous glut of supply and falling demand. It’s been reported that oil tankers are sitting on oceans full of oil. WTI oil is at $17.84/barrel, near 20-year lows. That is crazy and in the absence of a sharp increase in price – we are likely to hear talk of default and banks seeking help soon. The Fed will be purchasing up to $14.55B in mortgage-backed securities today beginning at 9:50 a.m. ET – 10:10, 10:40 – 11:00, 11:30 – 11:50, 1:00 p.m. ET – 1:20 p.m. ET. The 30-yr 2.5% and 3% coupons will see the bulk of today’s buying with $7.65B split between the 9:50 a.m. and 1:00 p.m. operations.
Coronavirus update: Here in the U.S., there are 678,210 cases of the virus that includes 640 new cases with 34,641 total deaths. There are 2,206,676 cases of the virus reported worldwide, 148,663 deaths while 558,440 having recovered from the virus.
You should continue to lock most of your clients but for new folks walking in the door, you can consider floating into the weekend and remove some time premium. In the absence of the 10-year yield piercing beneath .60%, it’s impossible for MBS to improve much further and see these gains hit your rate sheet.
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