Pre-July Front Contract (Aug13)

I’m back from vacation and am pleased to see that many bid/ask spreads have tightened and some trades have occurred over the last week.  Most of the trading seems to have been in the calendar spread markets focused on the Aug/Nov ’13 spreads.  (I saw trades in DEN, SDG and WDC calendar spreads.)

I imagine that some of that trading is geared toward how sustainable the rally in home prices will be as the summer evolves.  JPMorgan recently updated their view on housing and Citi weighed in with some interesting comments on whether inventory was getting better or worse (based on revisions).  All (mortgage) eyes remain fixated on 10-year Treasuries as even slight changes in interest rates result in large percentage changes in monthly mortgage payments, at these rate levels.

With the July release of the Case Shiller indices only one week away, here’s an update of the front contract table.

As noted above Aug ’13 bid/ask spreads have compressed to range from 1.4 (LAV) to 4.6 points (SDG).  (BTW- the combination of tighter Aug ’13 markets, combined with interest in the Aug/Nov calendar spreads has contributed to better Nov ’13 markets.  More later.)

Mid-August markets are consistent with continued growth in home prices (accompanied by a seasonal tail wind).   NYM lags with “only” a 4.2% increase over spot levels priced into the front contracts, while the mid-market for SFR is 8.2% over spot.    On a year-on-year basis, the SFR and LAV contracts are pricing in gains of >24% while BOS, CHI, NYM and WDC are priced for single-digit percentage increases.

Only LAX and SDG have open interest of >= 5 contracts so trading could be quiet.

As always, feel free to contact me ( if you have any trading ideas that you’d like to talk about or have touted.