Mortgage Rates Again Improved Today

Mortgage rates again improved today, but it wasn't exactly a straight line to success.  In fact, the underlying bond markets that directly impact lenders' rates began weakening yesterday afternoon and didn't really stop until after today's Fed Minutes ('weakening' implies higher rates). After the Fed released the Minutes from its most recent meeting, bond markets improved further.  This allowed the change into positive territory and helped 4.125% gain back some territory from 4.25% as the most prevalently-quoted conforming, 30yr fixed rate for top-tier scenarios.

After the FOMC Minutes came out, the 10yr rallied to its lowest yield of the session at 2.55% at 1:45. The headline was that the Fed will end the tapering of its monthly buying of treasuries and MBSs in October with the last $15B remaining at that time.  Many participants agreed that it “would be best” for the Fed to end reinvestment of maturing securities only when it raises rates for the first time since 2006, or even afterward.  Most preferred to end after.  The Fed’s balance sheet now stands at $4.38 trillion after all the buying.  Some FOMC members were concerned investors may be growing too complacent about the economic outlook and the central bank should be on the lookout for excessive risk-taking.  Concern about low volatility in equity, currency and fixed-income markets were discussed: nevertheless, “it was noted that monetary policy needed to continue to promote the favorable financial conditions required to support the economic expansion.”

The stock market also increased. A day or so ago I suggested we would not see the two improve at the same time in the near future----well I was wrong. The 10yr note continues to hold bullish technical bias and the DJIA yesterday on the selling took the index to its 25 day average and a long term uptrend line that so far held (see the chart in this morning’s report). The minutes had something for both markets; a more positive employment outlook for stocks, while re-affirming low rates will continue because of the sluggish growth outlook for the bond market.

Tomorrow besides the 30yr bond auction, weekly job claims are expected to be unchanged, and at 9:00 May wholesale inventories are expected up 0.6% after increasing 1.1% in April.   
 

Which market is going to be proven correct?  The stock market betting on increased economic growth, high earnings, and increased employment with higher wages. The bond market, arguably the more sophisticated market is presently tilting more to the weaker growth outlook with no substantial increases in wages, and more concerned about the developing geo-political condition in the mid-east and to a lesser extent in Ukraine/Russia. Ever since the Fed and other global central banks began ‘stimulating’ the economies of the world with extreme low interest rates it has been increasingly more difficult to read the tea leafs, there isn’t any historical precedent to compare. One thing is clear, this balance between interest rates and equity markets can’t last much longer. We always talk about trading with the markets and not trying to read the leafs; price action in both interest rates and equity markets now are sending off mixed signals---at least on the headlines.

In summary, Mortgage Bonds started the day off a bit to the downside putting a little pressure on rates. The sell off continued after the poor 10 year treasury auction. Bonds finally mounted a really and pared their looses after the Fed minutes which revealed members are split on the decision on when to hike rates. With rates near the top of of the range it still makes sense to float and see if we can find the bottom end of the range again.