Mortgage Market Overview – 06/12/2009

Mortgage backed securities (MBS) prices are sharply higher in active trading as demand at yesterday’s 30yr bond auction helped ease concern that international investors will slow purchases amid record U.S. debt sales and after release of this morning’s economic reports. Indirect bidders, an investor class that includes foreign central banks, bought 49% of the bonds on offer yesterday, the biggest percentage since 2006. Japanese Finance Minister said his contry’s confidence in U.S. debt is unshakable. Japan is the second largest U.S. creditor with $687 billion behind China, with $768 billion. The next auctions of Treasuries are set for June 23-25, when 2yr, 5yr & 7yr notes will be sold. U.S. import prices rose 1.3% in May, for the third straight month and the largest increase since July last year, reflecting the increasing cost of oil that threatens to undermine the economic recovery. Prices of imported goods, compared with a year earlier, dropped 17.6%, the biggest decrease since 1982. Prices excluding fuels climbed 0.2% to end a long string of declines, while being down by 5.85% on an annual basis. There are early hints of inflation pressure as commodity prices have been on the rise. The Consumer Sentiment index edged higher 0.3 to 69.0, showing little improvement and some concerns over inflation. The expectations component, which has been driving measurements sharply higher for the last two months, actually fell 4pts, the first decline since February. Inflation expectations rose, which typically appears when coming out of recessions, certainly reflecting higher prices at the gas pump. Crude oil fell from $72.68 a barrel, a 7 month high, to $71.27 a barrel after a record plunge in European industrial production prompted speculation that bets on an economic recovery are premature.

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