Mortgage Rates Rode the Roller Coaster

Today was one of those days that you wonder what the market thinking is as my morning report was talking on how the Mortgage Backed Securities (MBS’s) were taking a hit and the 10yr was heading back towards 2.0%.  Then the roller coaster hit the pinnacle and started its decent to a more positive platform and a huge sigh of relief was felt through the lending world.

In the bigger-picture, it is good to remember that rates are still in the lower part of a long term trend of improvement stretching all the way back to the beginning of 2014.  That is a great place to be, but it also means that rates can periodically bounce higher without violating that longer term trend.  Healthy corrections are part of the game.  The only significant risk in this environment is a broad shift into a long term trend that leads rates higher, and nothing about the weakness over the past two days is currently suggesting such a shift.  Conversely, nothing about the past two days is suggesting an immediate revival of the stronger trend. 

The Federal Reserve President Narayana Kocherlakota said that the Fed "can afford to wait" to raise rates and laid out a case for the Fed to stand pat until the second half of 2016 and gradually raise them to 2% by the end of 2017.  While this is interesting, it is not the in the majority of opinions by other Fed members.  MBS have not had a reaction to this.

3yr Treasury Auction had a better sale today than what occurred a few weeks ago.  A report regarding credit jumped higher than the estimate.  So, if consumers are borrowing more, then that must mean they are spending more - and that is great for the economy and bad bonds.  Right?  Not so fast.  The devil is in the details.  The internals show that student loans and auto loans are showing huge gains but revolving debt (credit card purchases by consumers) tanked.  Which means that consumer spending is not on the rise and that is bad for our economy and great for our bonds.

Tomorrow is biggest day of the week and all the action will be in the afternoon as we absorb 10yr Treasury auction and get to read the minutes from the last FOMC meeting.

In summary, the weakness in the bond market continued this morning, but by midafternoon, much of the losses had been erased.  With the favorable move in the bond markets, I am suggesting to continue to cautiously float as we have no data tomorrow morning, but do have a very important auction of 10yr treasury notes and the release of the minutes from the last FOMC meeting.  Both of those events could be volatile, so watch the markets closely if you see a spike in the 10yr note.