Mortgage Backed Securities (MBS) prices are lower this morning (making rates higher) as the governments efforts to bail out banks, Bank of America, stimulates demand for riskier assets.

Stocks have opened higher while Treasuries sold-off, with the 10yr up 20bps (basis points) to yield 2.40%.

This morning the Bureau of Labor Statistics released the monthly report on consumer inflation. The overall reading came in slightly worse at a month over month decline, the core rate which excludes food and energy came in slightly better. Year over year consumer inflation is rising at its slowest pace since the early 1960’s.

Consumer Price Index (CPI), fell in December fueled by the record declines for energy, gasoline and oil.

Consumer Sentiment rose mainly due to retreating gas prices.

The Fed's purchased $23 billion in MBS last week, shifting focus to lower coupons, 15 yr notes and Gannie Mae (FHA).

Industrial Production fell as factories are reducing output and spending as exports slow. This report is very important as it is one of the major reports that measures economic activity. If industrial production is stronger that typically leads to higher inflation and when it is weaker it leads to lower inflation.

As stated many times, the biggest enemy to mortgage rates is inflation. Since a mortgage backed security is a fixed income investment, inflation eats away at that return thus higher inflation leads to higher mortgage rates.

For example, if you have a 30 year fixed rate mortgage, you are paying a fixed interest rate for 30 years. Now, there is an investor out there that owns your mortgage, so that investor is earning the interest that you are paying but the rate they are earning will be fixed. So, if you are paying a 6% interest rate, an investor is earning 6% but as inflation creeps in, the value of the future earnings get less and less.

Currently, Mortgage Backed Securities (MBS) are down a small amount (4 ticks) on the day and yesterday we closed down 6 ticks. This has lead to some investors repricing for the worse but we are also getting reports that some investors’ rates are the same or better then yesterday.

At the current price levels of MBS, we should be seeing much lower interest rates. Although, until investors can get caught up on their current pipeline, they will be slow to improve rates. If you are closing within a week, locking would be a good call and hopefully you followed that advice from yesterday. If you are closing more then a week or so, floating will probably pay off.

Finally, most economic reports that have been coming out have been favorable to MBS. Inflation is low, unemployment is high and most of us will agree that the economy is not doing very well. We are in a recession and the general rule is bad economy leads to low mortgage rates.

Today is a shortened trading day due to the Martin Luther King Jr holiday on Monday and all banks and trading will be closed Monday. If anything major breaks I will get back to you.