Mortgage Rates Continue to Rebound

Mortgage rates did not move much today, but we are still seeing the trickle-down effect of the rates coming out of the banks on the wholesale side.  Nothing moved so much in bonds and mortgage markets after the previous two sessions of volatility. Markets still have not quite digested the change in the FOMC’s outlook and admitting that global markets do and will have an effect on US economic growth. The Fed also said it will move “gradually” to increase the FF rate after leading markets to believe rate increases would come like clockwork this year (four increases is what the Fed said in December).

Markets had already come to the conclusion the Fed would not move that much but the admission was welcome. Interest rates declined on comments the Fed and other central banks have little influence on inflation and that inflation is not likely this year. This means we are ending the week at the best levels as rates have battled back against the aggressive uptrend that began in March. 

This week was a mixture of good and soft data. Next week we start off with February existing home sales and numerous Fed officials. Tuesday more Fed officials, the PMI March manufacturing flash index, FHFA January housing market price index. Wednesday February new home sales. Thursday February durable goods orders, PMI services flash index, claims, and Friday the final Q4 GDP.

We are seeing the 10yr end this week at 1.88% from 1.98% last week, and we have gained a substantial amount in the MBSs.  The stock market ended positive, the dollar declined, and crude is up another $2.00 from last week. 

So far, the 10yr has held off the 2.00% support level, so even though I have yet to change my mind on going forward what I predicted earlier for lower rates, we are still in a tough spot here.  Until the past few days, it was a much easier call to assume that the move higher in rates would continue until we had clear evidence that the move was over.  Now the question becomes: is this enough evidence?  Analytically speaking, we are right on the edge when it comes to most mathematical models.  Even then, rates don't always behave as the math suggests they will.  Bottom line: there's more room for risk takers to take risks now, but with the understanding that any move back to recent highs in rates should be taken as a warning that the longer term pain might continue. 

In summary, rates dropped slightly today, as our three day rally rolled on.  MBS have gained almost 75BPS since Wednesday morning, an impressive pace that puts us back with March's best levels.  I am cautiously willing to ride this wave a while, as I would love to see it end up with treasuries heading in the right direction, but not at the 1.71% level from late February.  Will we make it there?  Stay tuned, this could get exciting!