Mortgage Rates Had a Wild Ride Today

Mortgage rates was on a bit of a wild ride this afternoon after a quiet morning that saw some robust numbers from ADP which again came in over expectations.  Even though this normally pressures the mortgage bonds, both the 10yr and MBSs were slightly off, but nothing to be alarmed about.

When the FOMC minutes came out this afternoon, it suggested the Fed is on track to increase rates this year, one or two times and there was discussion in the meeting about thinking of when the Fed should begin unwinding (selling) its $4.5 trillion bond and MBS portfolio it accumulated with the QEs from 2009 through 2013.  "Most participants anticipated that gradual increases in the Fed Funds rate would continue and judged that a change to the committee's reinvestment policy would likely be appropriate later this year." Once the minutes were released, stocks began their retreat and money moved back into the bond market.  

Tomorrow we get Weekly jobless claims, expected at 250K down 8K from the prior week.

The world is sure the economy will improve and interest rates will increase.  Interest rates are going to move lower as equity markets lose ground, global tensions increasing with Syria using chemical weapons once again after Pres. Obama did not follow through with his line in the sand when Syria used chemicals back in 2013. Trump a few days ago, was not concerned about leaving Assad in power, however his tune has now changed - “My attitude toward Syria and Assad has changed very much,” Then add the North Koreans becoming increasingly belligerent adding another missile launch yesterday.

To be sure, on the surface it is easy to believe rates will increase.  Expectations for improved economic growth are rampant now and inflation concerns have increased. It is difficult to find many who believe before interest rates increase rates will decline. All the technical work is bullish now, the only fly on the wall is breaking the strong technical resistance on the 10yr note at 2.32%. Once that occurs there will be a rapid move lower in rates as a brief sell-off begins in stock indexes.

Back to the FOMC minutes, I seriously doubt the Fed will be able to begin selling off its $4.5 trillion portfolio this year. I do not believe the Fed has any hint that by the end of this year the US stock market will be in full retreat, that the DJIA could be down as much as 4K points.

Remember where you heard this first – but in the meantime, let’s get back to mortgages as we need to be on the right side of the lock. I still believe that there still is a strong chance that rates will go lower, although we must see the 10yr back down around 2.10% - and this could be a very bumpy ride to get there.  The economic outlook espoused by most everyone is excessively too optimistic, the political climate here in the US and globally is not stable, and Central banks have finally and prematurely fallen for all the optimism.  

In summary, today's Fed Minutes revealed members discussed cutting the Fed's balance sheet (which includes MBS) later this year, a topic that had not previously been noted.  While only a potential, future policy change, bond markets still viewed the news as a negative, and markets sold off in afternoon trading.  Looks like the downward rate momentum has stopped for the moment.  With Friday's NFP March jobs report looming and ADP already predicting strong job growth, it is time to get defensive.  Folks closing within 30 days need to get locked, if they are not already.