Mortgage Rates Higher Again – Despite Improvement

Prior to when most people were at work this morning, the 10yr note yield spiked to 2.36%, up another 9 basis points from yesterday’s 2.27% that drove the rate up 12BPS. After the 29 day narrow rang trade between 1.99% and 1.86% broke I warned everyone that whichever way that long narrow range broke out, the move would be quick and large. Prior to the break to higher rates the consensus was that rates would more likely decline than increase. The market was loaded with trades on margins as the unfolding data has shown. The bond market juiced by the QE from ECB, the strengthening dollar, no serious worries about inflation increasing and the continuing smoldering of concerns stocks were about to decline on economic outlooks.

Most of those drivers have blown up - interest rates in Europe began increasing on belief the economy would improve with the QE and current data has shown signs of improvement. The dollar rally ended three weeks ago and since it has lost ground against the euro and other key currencies, crude oil prices ended the severe decline at $40.00 and now up to $60.00 renewing some inflation concerns. US stock indexes have not yet imploded in the correction expected even by the most bullish of investors. The Fed may or may not increase the FF rate in September as is currently the majority of thoughts, but whenever it happens markets are 99.99% sure it will. It looks like I am in the minority that it will not happen till 2016. Attempting to handicap the when changes on almost all key data - there is little certainty regardless of what you may hear or read when Yellen will decide. The FOMC has been resolute that the timing is dependent on economic performance and inflation forecasts.

This afternoon Treasury sold $24B of 3yr notes, as the demand was solid. Tomorrow markets will get April retail sales, a key data point. March business inventories also will be released, along with another new 10yr note issue at noon - strong demand like we had on the 3yr today will support some improved prices.

In summary, look for better prices tomorrow.  The spike to 2.36% early today may be the bow-off trading we are looking for. Improvements won’t change the immediate outlook but should begin to set up a new trading range at these higher levels. Whether or not we get want we expect tomorrow it will not lessen the present volatility. The 10yr made a new high yield this morning in the current trading and is ending the day lower than yesterday’s close, a possible key reversal for the last two weeks.