Mortgage Rates Stare Down Data, Blink?

Mortgage rates may be prepared to blink and give in to the tide of good economic data in the US.  Mortgage-backed securities (MBS) stubbornly held on to higher pricing/lower yields in early trading despite reports of better than expected US Gross Domestic Product.  Perhaps traders are waiting for the important Chicago PMI (manufacturing) figures, or more likely, for Fed Chairman Bernanke’s testimony before Congress before they blink and give in to higher levels.

When the last iteration of the 4^th quarter 2011 GDP was released last month and disappointed, I warned the readers of this blog that the truth was likely better than that report indicated.  According to statistics the average change in GDP figures from preliminary to final is over 1%!  Thus for traders to buy or sell based on the preliminary figures was highly suspect.  Yet when the preliminary figures were released last month MBS traders poured more money in to the investments fearing the US economy was slowing down.  Of course we know that all signs since then (almost) have indicated a much stronger US economy.

The Chicago PMI figures blew away expectations.  As the report came out, MBS prices began to fall, but not yet turn negative.  On a day without testimony from the Fed Chairman, I suspect the double-whammy of improved GDP and improved manufacturing figures would cause mortgage rates to rise.

Now don’t get me wrong, waiting to hear the comments of Fed Chairman Bernanke before Congress today is probably wise.  His comments on the action by the European Central Bank to pump 530 billion euros into 800 European banks through a Long Term Refinancing Operation (LTRO) will be listened to very closely.  Does this move take away substantial risk in Europe?  Secondly, the Fed’s program of buying MBS with the proceeds of maturing bond Treasuries investments (Operation Twist) is scheduled to end on June 30.  Will the program be continued?

Of course the expected answers to the questions just posed are—“Yes, European risk has been materially reduced with the action of the ECB but substantial risks remain,” and, “Circumstances at the time of the planned expiration of Operation Twist will dictate the FOMC’s actions, yet we remain prepared to do what is necessary to support the economic recovery.”  If these are indeed close to the actual words of the Fed Chairman, then current mortgage rates will be under increasing pressure to rise.