Mortgage backed securities (MBS) prices opened sharply lower (rates higher) as demand for better yielding assets increases amid rising confidence in the global economy. The monthly rollover took place overnight for FNMA securities switching the current coupon from June to July.
The government will sell $19 billion of 10yr notes today after demand was stronger than average, 2.82 bid to cover ratio, at yesterday’s 3yr note auction. Foreign investors purchased 44% of the total as the government relies on them more to sustain record borrowing. The budget deficit is projected to increase to $1.85 trillion for the year, equivalent to 13% of the nation’s economy. Crude oil prices rose above $71 a barrel for the first time in seven months on stockpiles dropping and speculation the dollar will extend its decline as investors turn from fixed income assets, like MBS, to other assets classes including commodities seeking an inflation hedge. The dollar fell on speculation central banks around the world may try to diversify their reserves away from the U.S. currency. The average 30yr fixed mortgage surged highest since November, offsetting low home prices and buyer incentives to push mortgage applications to the lowest level since February, threatening to deepen the housing slump and sideline prospective home buyers. According to the Mortgage Bankers Association’s weekly survey the purchase index gained 1.1% while the refinancing gauge fell 12% as the jump in borrowing costs discourage refinancing. The U.S. trade deficit widened in April as exports dropped 2.3%, the lowest level in three years as worldwide demand contracted further. The drop in exports reflected reduced demand for engines, machinery and metals. Exports to Japan plunged to the lowest level since 1994. Imports decreased 1.4%, led by declines in fuel, drilling equipment, computer accessories and toys. On a positive note, a higher level for imported consumer goods suggests that businesses believe that the consumer sector will be rebounding in the coming months. At 11am pt the Fed releases the Beige Book, the report on economic conditions used at the upcoming FOMC meeting, and its impact on MBS markets can be dramatic. Also at 11am pt, the Treasury releases the monthly budget report for May, an account of the surplus or deficit of the government. May typically shows a moderate deficit, however April posted a record $20.9 billion deficit when surpluses existed for 25 years.
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