Once.  That’s how many times this decade that 30-year MBS yields rose 1.00% in fourteen trading days.  Beginning May 20th, and continuing through today.  Once in ten years, and we were lucky enough to live through it.  How well the mortgage industry will live through its aftermath is another question.

The dust is still settling, but current 30-year conforming rates seem to be around 5.75%, or about 0.75% above MBS yields.  5.75% is a good rate, but consumers are fixated on sub-5.00% mortgages. Refinance volume at these levels will be slow, and current lock volumes are 75% lower than a couple of weeks ago.

Now that volume is slowing, look for competition to heat up.  The difference between consumer rates and MBS yields will likely shrink further, taking industry profitability lower.

Mortgage yields closed last week just under 5.00%, back to level from the days prior to Thanksgiving 2008.  In the pre-Thanksgiving doldrums, 30-year conforming mortgage rates were about 0.50% higher than today.  The Fed’s intention to buy MBS – and a whole bunch of bad economic news – eventually took MBS yields all the way down to 3.68% on January 12th.  A refinance boom ensued, but is very much in question now.

The Fed funds market was jolted awake.  All of a sudden, the market expects 0.50% of tightening from the Fed by early next year.  All due to a smaller-than-expected decline in payrolls for May.  Near-term interest rates – those that affect ARMs and short-term Treasuries – had been immune to the sell-off, but no more.  Two-year forward LIBOR soared by more than 0.40% on Friday.

What happened to the Obama put?  Is the Fed going to knock mortgage rates right back down?  The Fed has about $1 trillion of MBS budgeted to buy, and so it has the horsepower to move the market.  There is a little wrinkle, however.  This time around, it’s not so much that mortgage rates are up.  It’s that Treasury yields are pushing them up.  The difference between mortgage and Treasury yields is staying under control.

Will Treasury yields fall?  There is plenty of bad economic news to go around.  Without birth/death statistical bias, the May jobs drop would have been 538,000.  Working hours fell sharply, and consumer borrowing plunged a near-record $15.7 billion.  The impaired economy is still a long way from anything worthy of being called a recovery, opines Barron’s.

Look for volatility ahead as the Fed struggles with its task, and market psyche vacillates between recovery/inflation and continued recession.  The spread between best efforts and mandatory deliveries reflects as much; it jumped back above 75bps late last week.

The good news is that should mortgages rates fall, an enormous amount of mortgages remains to be refinanced, even considering low home values and job losses.

The New York Daily News is reporting that some members of the New York Mets may be suffering from swine flu, which is scary because usually, the Mets don’t start choking ’til September.  – Jimmy Fallon

Thanks for your business and have a good week.            — Tom Millon

Market	Close	Wk Chg
30-Yr Agency Note Rate	5.76%	+0.46%
30-Yr Mortgage Yield	5.03%	+0.58%
Note Rate vs. MBS Yield	0.73%	-0.12%
Mortgage-Treasury	2.08%	+0.15%
10-Yr Treasury	3.88%	+0.19%
2-Yr Treasury	1.35%	+0.41%
10yr- to-2yr Spread	2.53%	-0.22%
Fed Funds	0.21%	0.03%
Fed (Aug ‘09)	0.27%	+0.05%
Fed (Feb ’10)	0.88%	+0.44%
Dow Industrials	8,763	+263