Mortgage Rates Took Off - WOW!

Mortgage rates took off today after the drama was over last night was is the market's paradoxical reaction to Trump's victory. We have not seen a move like this since mid-2013.  All I can say is wow - just wow.  I certainly did not see this move coming from a Trump victory.   A Trump victory was supposed to create uncertainty which favors bonds and causes stocks to sell.   Instead, we got the complete opposite.  

Before the election, news that benefited Trump generally benefited rates.  This was logical because Trump connoted uncertainty and rates tend to benefit when investors seek shelter from uncertainty by buying bonds.  Indeed, bonds' first move was tremendously positive when Trump pulled ahead overnight.  Everything was going per plan, and those of us burning the midnight oil expected decent improvements in rates this morning.

But the positive narrative unraveled before sunrise.  Per the negative narrative, Trump's claimed policy goals stood a greater chance to hurt bond markets and push rates higher in the long-run.  That negative narrative was not a new concept, but very few market participants expected it to steal the show so quickly.  Once traders find themselves on their heels in the face of unexpected momentum, the only course of action is to turn around and run with that momentum indefinitely.

This is a time to take a breath – as I do believe it will take a month or so for markets to have any understanding about what a Trump presidency will do and how it will impact the economy. Volatility is running at extreme levels since midnight last night.

Why is this happening?  Several questions need to be address - can Trump get a huge fiscal package passed? (most believe he will immediately) What shape will health care take once ObamaCare is re-thought? How will Trump move toward better trade deals without starting a protectionist rampage? Now what will the Fed do next month?  Will inflation increase as fiscal spending increases? Who will Trump name for his cabinet? (Will he add business people who are not politicians?) What will the ECB and Bank of Japan do with their QEs and negative rates? How strong will the dollar increase that may lean against our global competitiveness?  What take will other world leaders have with a business man, not a politician, have? Can Democrats and Republicans work together? How will Trump deal with Obama’s numerous executive orders? These and others are the momentary questions, then there are long term and international issues he must deal with, but that is another story for a later time. Increasing US debt, that is coming like a freight train. The Supreme Court, the makeup of the Fed. What to do with immigrants? A buildup of the military? How will be redo the Iran deal that now has it ready for a nuclear bomb in nine years. Reaffirm our support for Israel. The ISIS crisis.  

The action today in markets - explosive interest rates, the improvement in the equity markets may appear to be a conundrum but it makes sense at this moment in time. Prior to the election many thought interest rates may improve on safety concerns if Trump won. Not so, the bond market is doubling down on Trump’s ability to turn the economic outlook around and with it an increase in inflation.  

We had a wild 24 hours whereas we saw the 10yr at 1.72% last night and the Dow down 1000.  After the markets closed we were up in the Dow and the 10yr stood at 2.07%.

We had some data today, but who cares.  Everything was surrounding the election and the upset. For the past month, all the models indicated to be bearish on the bond and mortgage markets.  I had no idea who was going to win, but the markets were driving us to LOCK for some time, but now I believe will see some pull back. 

The natural question: was that it?  Is it over?  Right now, I would assume the broader uptrend in rates will continue until we have definitive proof that it's over.  Some past precedent suggests we could get a bounce here, but the other past precedent is scary.  In this case, the scary eventualities are scarier than the hopeful eventualities are hopeful - at least for now. 

In summary, this was our worst day in quite a while after a shocking result in the Election put financial markets into disarray and mortgage pricing substantially worse.  It has been apparent since September that rates were trending slowly upward.  Today "slowly' turned to "rapidly" in the blink of an election.  Popular expectations were for a Trump victory to help bond markets, but, like the election itself, the unexpected happens.  We have broken through serious support levels, and are at levels last seen in March.  Who knows where we head from here, but floating remains a high risk, low reward proposition.