Mortgage Rates Up

Mortgage rates started weak this morning, erasing whatever gains that were realized last week.  Then inch by inch MBS prices climbed but still negative by the end of the day.  The 10yr was in another narrow trade as has been the case for the last eight trading sessions. Stocks a little better but still is not moving above 20K on the DJIA. Every word spoken, every word written, every word uttered now is about the massive increases in US stocks since Trump won. The world betting on the most perfect first 100 days ever seen in political history. There is one long time nationally known technician that is projecting 23K for the DJIA in the next three months - when I hear those kinds of forecasts it usually leads to some kind of reversal. Does not make me want to short the market but as noted this morning I will not be buying now.

Consumers apparently do not see it that way though if the confidence index this morning is anything to believe. The index was the highest since August 2001.  Looks good but still some concerns. Most of the improvement was with expectations.  Those seeing more jobs in the months ahead jumped higher while the percentage of consumers expecting their incomes to increase also went higher.  The consumer however, does not believe inflation will increase in 2017. 

Treasury sold $26B of 2yr notes this afternoon. Given that it is during holidays we will not be too critical but it did not receive much demand. Tomorrow November pending home sales from NAR, contracts signed but not yet closed, expected up.  At Noon, the $34B 5yr note auction.  

In case there are those that still believe interest rates may decline once again - the bond buy trade since 2008 is over. Rates will chop higher.  Trump’s fiscal spending, higher inflation expectations are death to bond investors. The bond market rally began in 1982, it ended this year. The Fed is ready to move and the majority believe it will move quickly particularly if there is even a hint inflation is edging higher. “The biggest losers from the end of low for long next year are all the assets that investors only bought for yield: passive and long-only strategies in government and investment grade debt, including corporate bonds trading at record-low spreads because of the ECB and BoE’s purchase programs, but also utility and telecom stocks, so-called low-volatility funds, and REITs.”

In summary, with the incoming administration's policies driving a large portion of upward rate momentum, mortgage rates will be hard-pressed to make significant improvements until after Trump takes office.  Rates can move for other reasons, but it would take something big and unexpected for rates to move appreciably lower. We would need to see a sustained push back toward lower rates (something that lasts more than 3 days) before anything less than a cautious, lock-biased approach makes sense for all but the most risk-tolerant borrowers.