Should REIT Investors Worry about Prepayment Speeds Increasing?
Prepayment risk is a fact of life even in rising interest rate environments. After all, even if rates are rising, people still move.
The elephant in the room at the Fed is that rates need to return to more normal historical levels at some point.
Credit conditions tightened modestly over the late summer. Commercial and industrial loan growth slowed, especially in the energy space where some credits are becoming distressed.
In September 2013, the Fed was forecasting that 2015 inflation should be 1.6%–2%. Two years later, the Fed is forecasting 0.3%–0.5%.
Since its September 2013 meeting, the Fed has been lowering its estimates for 2015 gross domestic product (or GDP) growth.
After the September FOMC meeting, the Fed forecast that 2015 unemployment would come in at 5.0% to 5.1%, a decrease from its June forecast of 5.2% to 5.3%.
The initial take on the September FOMC minutes was dovish, which pushed bond yields lower and sent stocks higher.
Ginnie Mae and the to-be-announced market The Fannie Mae TBA (to-be-announced) market represents the usual conforming loan, the plain Fannie Mae or Freddie Mac 30-year mortgage. When a mortgage banker…
Fannie Mae TBAs, which had ended the prior week at 104 18/32, gave up 5 ticks to go out at 104 13/32 for the week ending October 9.
Two weeks ago, interest rates fell on the weak jobs report, but mortgage rates actually increased. Last week, interest rates rose, but mortgage rates more or less held steady (they rose by a basis point to 3.89%)
After closing out the prior week at 1.99%, bond yields, as tracked by the iShares 20+ Year Treasury Bond ETF (TLT), rose by 10 basis points to go out at 2.09%.
The highlight of last week was the release of the FOMC minutes on Thursday, which showed the Fed was worried about international events (read weakness in China) and therefore chose not to raise rates.
As we move forward with earnings season, this week begins the deluge of earnings reports, which are dominated by the financials. Most of the big banks will report numbers this week.
Mortgage applications increased 25.5% for the week ending October 2, 2015 against a decrease of -6.7% in the previous week.
Employment costs increased 0.2% in the quarter ending June 30, 2015. This was a small increase from the fourth quarter of 2014.
In September, the labor force participation rate slid to 62.4%, its lowest point since 1977. The labor force declined from 157.1 million to 156.7 million, while the population increased from 251.1 million to 251.3 million.
In September, the unemployment rate held constant at 5.1%, or about 8 million people. The underemployment rate slipped to 10.0%, and the labor force decreased by about 350,000 people.
After closing out the prior week at 2.16%, bond yields fell by 17 basis points to go out at 1.99%. The recent calm in the bond market was short lived, as bond yields tanked after the jobs report.
The ten-year bond yield fell by 3 basis points last week. Ginnie Mae TBAs rose by 25 ticks to 105, outperforming Fannie Mae TBAs, which rose by 20 ticks, or about 5/8 of a point.
Fannie Mae TBAs, which had ended the prior week at 103 28/32, rose 20 ticks to go out at 104 18/32. The ten-year bond yield, which you can trade through the iShares 20+ Year Treasury Bond ETF (TLT), fell by 17 basis points.