April 1, 2020 - Market Update

After buying well over $250B in MBS in the past week and driving prices 2-3 points higher, the Fed has scaled back their purchases.  Perhaps in a move to provide some relief to lenders facing numerous margin calls, the Fed is now targeting $30B per day down from $50B last week.  On Tuesday they purchased $19B of the target, which was still several multiples of the total reported origination.  In any event, mortgages underperformed treasuries with prices now roughly ¾ point lower than their peak last Friday.  

According to the MBA, mortgage applications rose 15.3% last week, led by a 25.5% increase in refinances, while purchases were down -10.8%.  Despite all the volatility in MBS prices, we have seen little movement in primary rates the past week as lenders struggle with full pipelines.  The first April specified lists should start hitting the market this morning so we will have to see how well they are absorbed by investors.

Treasuries continued to rally late Monday as the reality of no quick cure to the virus set in and investors took risk out of equities.  That trend continues this morning, with the 10-year yield back down to 0.61% while the 30-year bond yield fell to 1.27%. 

US consumer confidence fell in March to the lowest level in three years in a survey conducted before confirmed cases of covid-19 spiked.  Meanwhile, President Trump dropped his optimistic tone on Tuesday, telling reporters that as many as 200,000 Americans may die from the disease even with drastic measures to keep people in their homes.  As you might expect, stocks sold off on the grim projections with the DOW falling 410 points and treasuries and gold rallying.  San Francisco President Daly tried to offer some comfort saying the Fed will do “whatever it takes” to help stabilize the economy and be well positioned for expansion after the virus subsides.  Translation = stimulus package #2 is heading down the tracks.  Unfortunately, it is unclear when we will reach a peak in confirmed cases or be able to start piecing the economy back together, so the next several weeks will be extremely difficult.  China reported a surprise increase in their key PMI factory gauge in March, but that was met with much skepticism given the world’s experience with covid-19 thus far. 

For the week ending 3/18/20, home equity loans outstanding rose $2.3B to $317.2B. Outside of an increase during the last government closure, this was the first increase in home equity loans since the week ending 2/1/12, when they rose $4.7B to $553B. This is identical to the many firms preemptively drawing down their credit lines to boost their cash positions and protect against a liquidity crunch.