Market Review
Jan 2012

Over the past month, treasury and MBS prices have continued to grind higher as more discouraging news from the eurozone kept a flight-to-quality bid in place. Nine of the seventeen eurozone countries received downgrades to their sovereign debt as talks between Greece and private bond holders failed to reach an agreement. European leaders are still faced with tough decisions on fiscal tightening as well as on the establishment and financing of a bailout fund for European banks. Given the lack of a substantive agreement over the last several months, market participants remain skeptical that the latest vow to speed the pace of talks will bear fruit.

Closer to home, the congressionally-mandated G-Fee increases, established in part to pay for extensions of the payroll tax cut and unemployment benefits, has created somewhat of a disconnect between MBS prices and lender rate sheet prices. It creates an interesting dynamic when the government is purchasing MBS to keep rates low and help fuel a recovery in housing, and yet the same government is increasing rates on the G-Fee side, increases that will trickle directly down to the borrowers that are hoped will lead a housing recovery.

Other than the continually weak housing sector, domestic economic reports have been mostly encouraging of late with many reports showing at least modest gains. Employment and production measures are creeping higher and consumer confidence measures have shown some improvement. Given the apparent overbought condition in bonds, some correction may be in store in the short term. But minus any significant action out of Europe, it's not hard to see rates remaining relatively low for the time being. – Lindsay Hill