Mortgage Rates Are Relentless

Mortgage rates continued a relentless move higher today, as financial markets continue rapidly adjusting the price of new realities. The last time rates moved a quarter point higher in 2 days was during the throes of the taper tantrum in mid-2013.  Incidentally, the following 2 days also saw a quarter point spike, bringing rates a total of 0.5% higher in 4 short days.  Those were the worst 4 days for mortgage rates on record.  It is scary to consider, then, that the past 2 days have matched the first 2 days of that 4-day run in 2013.  In other words, we're on pace for a repeat.  Now, having said that, I think a full-on repeat is unlikely.  The adjustment to the price of 2013's realities was a much bigger deal than the current adjustment should be.

The reaction to the end of the election was expected, relief that had kept investors hedged in the bond market. I get that but I believe markets have overrun reality now and expect rebound and consolidation in the next few sessions. The 10yr has gone up 34BPS in yield since the close Monday while MBS prices are down 168BPS.  Yes - Trump shocked but markets are irrational now expecting much more than will occur. In any case, there is not anything to sink teeth into about how Trump will frame his cabinet, get along with Republicans and Democrats, how he will relate to foreign leaders. Those are just the headlines that are being wagered on now, believing there will be good times ahead. I just do not see it that clearly - Trump still has a lot to prove but markets now thinking good times for stocks and much higher interest rates.

In the end the high expectations now are being over-exaggerated by markets. The entire election and campaigns has been unprecedented and now markets are also over-reacting. I do not mean going long treasuries or floating locked mortgage rates. Momentarily over-sold but the move higher in rates has been so powerful that any expectations of another drop-in rates back to levels that will revive re-financing or motivate increased bullishness in the rate markets is highly unlikely with the fundamental outlook. Increased inflation, central banks about to begin unwinding much of the QEs and negative rates that have driven markets for most all this year.

Tomorrow is Veteran’s Day. Banks will be closed but other markets will trade. The only data, the U. of Michigan consumer sentiment index normally it gets attention, but this time around and with everything that has happened this week, not much.  The expectations component was especially weak in October, pointing to weakening confidence in the jobs outlook. Little change is expected for the November mid-month in a report that will offer an important early look at the post-election mood - not much however, just 48 hours ago.  

Technicals are obviously bearish but the near term is getting way to negative. The two key momentum oscillators are used have not been this over-sold going back to 2011 and it cannot last much longer. That said any improvements will not change the negative fundamental or technical outlook. Emotions running at extreme levels being criticized that Trump won. He has huge baggage as does Clinton, until the election both were considered poor choices but no one including me thought Trump had a chance. Now that he has won, the losers cannot believe it and are lashing out in frustration - then buying bank stocks. Sometimes we do not get what we want or expect - best to focus on reality rather than hurt feelings and move forward. Please do not shoot the messenger.

In summary, financial markets continued to digest Donald Trump's shocking victory in Tuesday's election today, and lost further ground.  It is times like this when locking early pays huge dividends, and I am glad I have been making that suggestion for quite some time now.  I do not know where bond markets will level off, but do know it may not be a while before it happens.  I still feel that floating is a high risk, low reward proposition.  It would take a new, equally massive motivation for the repricing to occur in a friendlier direction.  Until then, a bounce lower is not out of the question.  Indeed, that can often happen as a bit of a corrective move to the initial flood of these "repricing surges," but there's no guarantee it will be very big or that rates could not continue higher before it happens. Float with extreme caution, if you feel you must.