Financial Friday – September 29th, 2017

WEEKLY UPDATE

CONTENTS

Weekly Review

This past week the stock market ended “mixed” with the Dow Jones Industrial Average and S&P 500 indexes recording marginal gains while the NASDAQ Composite Index slipped modestly lower.  Investors were wary of continued rhetorical threats between President Trump and North Korean dictator Kim Jong-un who boasted North Korea would test a hydrogen bomb somewhere over the Pacific Ocean.  However, the strong words traded between the U.S. and North Korea took a back seat to the week’s most significant piece of economic news that arrived on Wednesday with the Federal Reserve’s September Federal Open Market Committee (FOMC) Policy Statement.

As widely expected, the Fed held the fed funds interest rate at the current range of 1.00-1.25%, but hinted they would raise rates by 25 basis points (0.25%) at their December meeting while looking to raise rates three more times in 2018.  U.S. Treasuries and mortgage bond prices ended Wednesday on a sour note, falling in response to the September FOMC Statement.  Also in response, the fed funds futures market is now showing the implied probability of a rate hike in December has increased to 72.8% from 57.8% the previous week.

More importantly, the FOMC announced it will initiate the balance sheet normalization program beginning in October.  This program will allow the Fed to begin reducing its massive $4.5 trillion balance sheet, of which $1.8 trillion is held in mortgage backed securities, by not reinvesting in some of its Treasury and mortgage bonds as they mature. This “rolling off” of its bond holdings will begin with monthly reductions of $4 billion in mortgage securities and $6 billion in Treasuries with these levels rising every quarter until reaching $20 billion in mortgage securities and $30 billion in Treasuries per month.  So, how long will it take the Fed to reduce its $1.8 trillion in mortgage securities?  Current projections show it will take about seven years.

Mortgage Rate Forecast with Chart – FNMA 30-Year 3.5% Coupon Bond

This past week, the national average 30-year mortgage rate increased to 3.97% from 3.94%; the 15-year mortgage rate increased to 3.27% from 3.22%; the 5/1 ARM mortgage rate remained unchanged at 3.20% and the FHA 30-year rate rose to 3.60% from 3.50%.  Jumbo 30-year rates increased to 4.20% from 4.19%.

The FNMA 30-year 3.5% coupon bond ($103.23, -4.7 bp) traded within a 28.1 basis point range between a weekly intraday low of $103.00 on Wednesday and a weekly intraday high of $103.281 on Tuesday and Wednesday before closing the week at $103.234 on Friday.

Mortgage bonds continued lower during the week to test support levels at the 50-day ($103.21) and 100-day ($103.05) moving averages.  Friday, the bond bounced higher off of the 100-day moving average support level resulting in a slow stochastic crossover buy signal while being deeply “oversold.”  This suggests the bond could continue higher toward the 25-day moving average resistance level in the coming week to send mortgage rates slightly lower.

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