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July 31, 1992
Thursday was the worst day for mortgage rates since January, though the lost ground may well be regained in the next couple of weeks.
Second Quarter Gross Domestic Product crawled to a 1.4% gain. Consumer Confidence plunged in July, down 11.6 to 61; Existing Home Sales fell 2.9%, and Personal Income showed no gain at all in June.
In other, brighter data, New Home Sales surged 7.9% in June, Factory Orders rose a healthy 2.3%, and Machine Tool Orders rebounded 31%.
Thursday's spike in mortgage rates was a peculiar event because Treasury yields were uhchanged. Most of the time, 95 days out of 100, mortgage rates move in lockstep with the Treasury market. Thursday was one of the other five days.
Since mortgages have a tenyear average life, changes in rates on tenyear Tnotes tend to set the yields of Fannies, Freddies, and Ginnies. Those yields in turn establish retail mortgage prices.
When Treasury yields move, everything moves: corporate bonds, municipal bonds, junk bonds, and mortgages.
How much do they move? That depends. Each separate debt instrument trades at a "spread to Treasuries" varying with credit quality. The debt of an extremely creditworthy borrower (Ginnie, IBM) trades at a tight spread to Treasuries, often only a fraction of a percent higher in yield. Poor credits (junk) may trade at yields several percent above Treasuries.
95 days out of 100, life progresses normally with predictable spreads. But, when the debt of a particular issuer changes in its spread versus Treasuries, a great deal of money changes hands by surprise.
On Thursday, mortgage market spreads raced away from Treasuries. Treasuries had had a long run of good gains, then showed a little weakness, but no particular problem. Mortgage securities cratered. The GinnietoTreasury spread has increased a quarter point in ten days.
In the perverse world of mortgages, this rise in mortgage rates may have been driven by the likelihood of lower rates to come. Mortgage investors hate to be prepaid out by refinances, and tend to try to unload mortgages that look vulnerable. This week the Mortgage Banker's Association refinance index hit its January 17 high, and it's not a coincidence that mortgage rates popped up.
The faint of heart should lock in. Those willing to bear risk may be wellrewarded by waiting through the August 7 employment data, and the following week's Treasury auction, but it's going to be a rough couple of weeks.
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