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Tim Howard

Bond Market News

Wednesday, May 29, 2013 - Article by: Tim Howard - VanDyk Mortgage - Message

Yesterday's solid economic data from the housing sector and consumer confidence has the Stock markets questioning as to how long QE will live on. The prospect of QE3 ending sooner is pushing Equity prices lower this morning. Throw in profit taking after the Dow and the S&P hit record high closes yesterday and you have a recipe for lower Stock prices this morning.

The Bond markets are near unchanged, but are well off their best levels of the session in fear that the punchbowl may be taken away or at least tapering may begin sooner rather than later. Bond prices are also being capped by the $35B 5-Year Notes that the Treasury is offering today and comes after yesterday's horrific 2-Year auction results.

In housing news, Lender Processing Services reports that home prices rose 1.4% from February to March and jumped 7.6% year-over-year in the month ended in March. The average home price hit $213,000 in March, up nearly 3% since the beginning of the year. However, the Mortgage Bankers Association reports that mortgage application volume fell for the third week in a row by almost 9% as home loan rates hit their highest levels in a year.

Technically, we have not yet seen any signs of stabilization in the Mortgage Bond markets as volatility continues to dominate trading. As we said yesterday in the "Word From The Bond Pits" after the close of trading - "the MBS market now has to deal with convexity selling, which is when players sell Bonds in a rising rate environment to unwind trades that they put on to hedge against the risk of negative convexity. Negative convexity is a phenomenon attributable to callable bonds (particularly MBS) that causes the price to increase less, or even decrease, when interest rates decrease.

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