Puerto Rico debt problem is coming back to the forefront

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Published Date 10/4/2017

Today's Mortgage Rate Summary

How Rates Move:

Conventional and Government (FHA and VA) lenders set their rates based on the pricing of Mortgage-Backed Securities (MBS) which are traded in real time, all day in the bond market. This means rates or loan fees (mortgage pricing) moves throughout the day, being affected by a variety of economic or political events. When MBS pricing goes up, mortgage rates or pricing generally goes down. When they fall, mortgage pricing goes up.

Rates Currently Trending: Neutral

Mortgage rates are moving sideways so far today. The MBS market improved by +12 bps yesterday. This probably wasn't enough to improve mortgage rates or fees. The market experienced moderate volatility yesterday.

Today's Rate Forecast: Neutral

Jobs: The September ADP Private Payrolls was better than market expectations and much, much stronger than Wall Street's "whisper" numbers. While 135K new net payroll adds is a much slower pace than the 200K pace that we are used to this year, the drop was widely anticipated due to both of the hurricanes that hit two of our nation's most populated states. The market was expecting 125K, so this was better than that. The one interesting part of this report is that in some sectors, business hiring could have actually been higher than it was (even with the hurricanes) but lack of competitive wages crimped things a bit. Does this mean that we are finally going to see wage inflation in the next month or two?

Location (Our title for any type of housing news): Weekly Mortgage Applications dropped -0.4%. Purchase Applications fell by -2.0% while Purchase Applications improved by 1.0%.

ISM Services: This represents over 2/3 of our economic engine. Any reading above 50.0 is very good and expansionary. The market was expecting a very high reading of 55.5, but instead, we got a very robust reading of 59.8 which is one of the highest readings on record.

Fed: Today at 3:00 we get St. Louis Fed President James Bullard and Fed Chair Janet Yellen from the Community Banking Conference.

Eurozone: We will hear from ECB President Mario Draghi.

Spain: Catalonia has said that it will officially declare its independence from Spain on Monday after this weekend's referendum vote which was a landslide. The Spanish government meanwhile says the results are illegal and are busy arresting anyone that they can find. This is a major issue for Spanish bonds and the future of the Eurozone.

Puerto Rico: Their bonds are in the sewage pipes. They were previously in the toilet as they have attempted to declare bankruptcy several times (but it was not permitted by our Gov). President Trump's off-the-cuff comments that their debt might need to be wiped out (not that he has the power to do that), has added even more pressure on their bonds. This is an interesting situation. While everyone wishes all the wonderful people there a speedy recovery, it is clear that this is going to hit bondholders and brings into question the "safety" of investing in government bonds. Puerto Rico is a strange bird; it's a beautiful island that the U.S. acquired as spoils of war in 1898 from the Spanish-American war and then made into a "territory" primarily to house a military base and control the region militarily. While those born there are full-blown U.S. citizens, they don't pay federal income taxes, and they cannot vote in our national elections (this is due to the Electoral College System where the States elect the president...not the popular vote...and PR is not a State). The debt issue is severe at over $70B, and much of that held by U.S. mainland private pensions for U.S. workers so this could hit their retirements in a big way. Since PR has contributed ZERO to our Treasury (no federal income taxes), it will be a big hit to the U.S. taxpayer to rebuild their island...which cannot be done by PR issuing new bonds...no one will buy them. They have borrowed as much as some of our most populated states, yet they have only have around 5M people there. Also, the entire infrastructure is almost 40 years old from power generators, etc. So what was all that money spent on? And if it was wasted (it was) then how do you give that same government system more money and expect it to be different. Very interesting case indeed. These people need help...but they needed help WAY before the hurricane hit.

Today's Potential Rate Volatility: Average

Mortgage rates are getting it from both directions today. Mortgage rates are being helped out by the concern over Puerto Rico's debt. On the other hand, mortgage rates are getting pressure over the ISM Service numbers. Today could be a relatively volatile day while the markets sort it out and due to Janet Yellen's comments this afternoon.

Bottom Line:

If you are looking for the risks and benefits of locking your interest rate in today or floating your loan rate, contact your mortgage professional to discuss it with them.

Source: TBWS

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