Mortgage Rates Ran Rapid This Week

Rapid and deep changes in the bond markets here and in Europe this week. Like shaking a bottle of coke before opening it, a rather unpleasant reaction. The idea that Europe was the next bull market in stocks swept the trading circles as one after another jumped on the moving train. The dollar that was widely believed would continue to decline has changed directions is weakening in the last few weeks. Germany’s 10yr bund almost fell to zero at 0.07% finally got a bounce taking it to 0.37% this week and all Europe’s interest rates increased. This all added up to a breakout for the 10yr treasury note that for 30 sessions had been tied to 1.99% and 1.86% on the low end. At the time I was warning that once that length of flat trading was breached the resulting move would be swift and volatile.

Most economic news this week was weaker than forecasts. Two other factors must be considered about why the US interest rates increased this week - the decline in the dollar and the stealth increase in Europe’s economies. For five years the markets saw Europe as destined to never improve and basically ignored it as a factor in the global economies. Not the case though, Europe is now outpacing the U.S as it cashes in on ultra-loose monetary policy, weakness in the euro and oil prices, fading fiscal austerity, surging stocks and renewed bank lending. Kind of a newbie but still there have to be reasons whether significant in the long run or not. Greece has caused turmoil recently but has settled down in terms of markets reactions to anything coming from any EU or Greek official.

Next week; is employment week on Friday. Fed officials have been let out of their week long lockdown ahead of the FOMC and are itching to talk, more Fedspeak that markets do not, or should not, need or heed. Look for the 10yr note to continue higher in rate, taking the note to 2.20% where I believe it will stop increasing and start a renewed decline. MBS prices likely to drop more following bond prices down, but will find footing when the 10yr is at 2.20%.

In summary, interest rates took the biggest jump in weeks this week. The 10yr rate up 20BPS. The worst week for U.S. 10-year notes in almost two months got even bleaker as a rout in European bonds continued to diminish investor appetite for relatively higher U.S. yields. Our week went bearish on Tuesday and most continues to worsen. I remain optimistic though, still based on work that I believe another run lower in rates is possible after this round of selling. Depends on April and May economic data when we can finally kick the weather excuse out. Q1 was much weaker than expected, more weakness in April and May will give us another run lower for interest rates.