When the stock market tanks – as it did Monday when the Dow dropped 635 points – it usually translates in the yield on the 10-year Treasury falling, which is exactly what happened. But this time around the decline resulted in the benchmark bond falling to a new all time low – 2.33%, which means mortgage bankers may be in for a boatload of refinancings.
According to Tom Millon, president of Capital Markets Cooperative, Ponte Vedra Beach, Fla., rate locks have risen roughly 30% in the past few weeks. “We've see a large surge in locks,” Million told National Mortgage News late Monday.
CMC, which hedges the production pipeline of lenders that fund $25 billion annually, said anecdotal evidence suggests quite a bit of the new activity represents refinancings.
However, lenders also fear that the tremendous stock market declines of the past few weeks have caused so much wealth destruction that consumers may not feel like buying or refinancing – especially at the high end.
As for the bond market, while agency MBS spreads to the 10-year Treasury are now the widest seen in more than two years, the movement in spreads to other benchmarks such as swaps were “more muted,” said Mahesh Swaminathan, managing director and head of MBS strategy at Credit Suisse.
Despite the fact that prepayment risk is not as large as it used to be, whenever there are large moves in rates, mortgages “have a hard time” because of their negative convexity and other factors, he noted.
The move in mortgages seen Monday is “something that will be reversed” Swaminathan added.
A Credit Suisse report notes that in the long-term the S&P downgrade (on the U.S.) will be less influential than the debt ceiling agreement reached last week. “From an agency MBS investor's standpoint, it is more important that the government can stand behind [the securities it] guarantees. That is something that the debt ceiling [agreement] addressed,” he said.
