Mortgage Bonds Taking a Hit This Morning

Mortgage bonds are taking a little bit of a hit in the last few hours following the various economic reports that came out this morning.  The number of new jobs was lighter than anticipated, but the stage was set with yesterday’s ADP report.   What is now becoming a concern is the revisions to prior reports, where we had a large increase in the November report and only a small decrease in October.  Overall, looking at the 3-month average, there was not much of a change from expectations. The most important report was the Job’s data which was a mix bag but the 2.9% Wage increase (the largest in eight years) cannot be ignored and is negative for pricing.  

The second report from manufacturing was Factory Orders and the decrease that it was anticipating came in line from what was stated, which did not alarm the traders.

Yesterday’s MBS gains were nice to see, but did set off some concerns as the reasoning for it did not add up.  What was especially interesting was that volumes were very low and like levels during the two-week session surrounding Christmas.  I believe that the thin volumes “skewed” the results from yesterday and a correction is taking place this morning as we are down 30BPS as of 10:30AM, and the 10yr has jumped to 2.41% after closing at 2.35% yesterday. 

Today we have Dallas Fed President Kaplan, Chicago Fed President Evans, and Richmond Fed President Lacker out there talking.  With the mix results from this morning, and the correction from yesterday’s trades, I see that we will have a choppy day with ups and downs, and may wind up at this point by the end of the day based upon what the Feds talk about, and that can always spell trouble going into the weekend.

Floating seemed like a good idea and it may still be if you have the stomach for it.  The best bet is to lock in these rates as we did see a nice improvement.  There could still be more out there, but the volatility of the markets, and the idea of still seeing that everything will materialize when Trump takes office in a few weeks, the markets are not willing to give everything back that it has taken to get to these levels.