Bay Area California Housing Market Update/ Jesse Stroup

Yesterday 30 yr mortgages had one of its best days in over a year; the 3.5 Oct MBS increased 41/32 (1.28 bp). The Fed did what markets were expecting plus more. The view prior to the FOMC policy statement at 2:22 yesterday was that the Fed would institute "Operation Twist" as it has been tabbed, selling shorter dated notes and replacing them with longer term notes and bonds to drive down long term rates. The amount of shifting was expected to be about $300B, the Fed said it will be $400B. There was not much consideration in markets about anything directly impacting the mortgage markets; the Fed however surprised markets with the announcement it would turn back to buying MBSs with principle pay downs on MBSs it holds and instead of investing back into treasuries as it had been doing, investing in more MBSs. The reaction was swift in the mortgage market as MBSs out ran the 10 yr note by a mile. MBSs gained 1.28 basis points while the 10 yr gained just 24/32 (.75 bp).

This morning in early activity had mortgage prices up as much as 22/32 (.69 bp) frm yesterday's closes (8:00 am). At 9:00 +16/32 (.50 bp); at 9:30 MBSs +18/32 (.56 bp). The 10 yr at 9:30 +24/32 at 1.78%-8 bp. The DJIA opened -192, NASDAQ -72 and the S&P -21.

The equity markets took a huge hit yesterday, in futures trading early this morning the DJIA traded down 277 at 9:00. All European markets were hit hard this morning on the Fed's statement, weaker economic reports and the continued difficulty in getting anything accomplished with Greece 's debt mess. Euro-area services and manufacturing output shrank for the first time in more than two years in September as the region's worsening debt crisis added to concerns that the economy could slide back into a recession. German bonds rose, with 10- and 30- year yields dropping to record lows, as speculation the world economy is headed for another recession increased demand for safer securities. And it isn't just Europe and the US ; a preliminary index of China purchasing managers was 49.4 this month, a reading below 50 indicates contraction.

Most of the headlines from the FOMC meeting were focused on the confirmation that the Fed would move out the curve with its balance sheet to push long term rates down. It didn't escape markets though that the FOMC lowered its economic outlook from previous meetings. In the statement the Fed said "Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets". The addition of the word significant was inserted from previous statements, confirming the Fed is becoming more fearful of falling back into recession.

Weekly jobless claims this morning were down 9K to 423K, last week's claims were revised up frm 428K to 432K. Continuing claims continue to decline, 3.727 mil frm 3.755 mil last week. At 10:00 the FHFA July price index increased 0.8% for the month, yr.yr prices are down 3.3%. August leading economic indicators at 10:00 +0.3%, better than +0.1% expected. No reaction to the two 10:00 data points.

It is a good last 24 hours for the bond and mortgage market; a serious whipping for stocks. These kinds of moves usually lead to increased volatility; we expect to see wide swings in the bond and stock markets over the next week. Attempting to anticipate how much lower interest rates can go is difficult and we won't even try now until markets settle down. Europe 's problems and the Fed's lowering its outlook for economic growth will continue to play out. This week doesn't have much economic data, next week there isn't a lot either. Next week Treasury will auction about $99B of 2s, 5s and 7 yr notes.

Jesse Stroup / 208-921-6095