Mortgage Rates Take a Turn for the Worst

Mortgage rates shot higher today, more than many us expected ahead of the FOMC policy statement tomorrow. The 10yr held its support level for five sessions, until today. MBS prices crumbled under the weight of strong equity markets and the belief that tomorrow the FOMC policy statement will be hawkish on more rate increases and the reality that the Fed is on goal to begin the tapering.

The Senate voted today to begin open debate on health care. Media reports that the Republicans are taking a risk by allowing debate on the Senate floor.  Yes, it is a risk but continuing to fight is more of a risk as Senator John McCain echoed when he addressed the Senate. As you know he has been diagnosed with a brain tumor. He came back to vote to get to 50 votes needed to proceed. Time now for those recalcitrant Republicans to get down to work, and Democrats also need to stop the constant obstruction of anything having to deal with health care. Both parties are embarrassing to watch. The US is in trouble and no one really seems to care. McCain did say he would not vote for the Republican’s health care bill as presently offered. Not only health care, but every idea that is presented regardless of what side of the isle it comes from is met with complete distain by the other political party.  Two moderate Republicans who are worried about people losing health insurance voted against the effort to move forward, while all 48 Senate Democrats remained united in their opposition to undoing Obamacare.  

The unexpected amount that increased rates today pushed the 10yr and MBS prices into negative technical positions. The increased volatility may continue tomorrow afternoon when the FOMC releases its policy statement. Likely a lot of the same vies of economic improvements and the belief wages are about to increase = the same stuff the Fed has been saying all the year with no success in terms of its outlook. The consensus now is the Fed is on track to increase the FF rate in December and in September begin tapering its balance sheet - very slowly. Stock markets still hold the cards, increasing, and ignoring the economic reality.

Disappointing that rates spiked a much as they did today, but we will see tomorrow how markets react to the FOMC meeting. The amount of the increase is somewhat troubling in terms the near-term outlook. The current increase in crude oil today added to the bearish trade today - and be sure the FOMC statement will make mention that oil prices are now increasing over the last week.

As I continue to stress - any significant rate improvement in rates must be triggered by the equity market finally correcting, that these days does not look likely as investors continue to ignore the weak economic outlook and betting on a tax cut. A tax cut is not going to happen this year and may not be achieved for another year. The last time a major tax overhaul occurred was in 1986 when Regan was in the White House and it took over a year to get done. With the present divide in Congress one must be using rose colored eyes to expect anything significant on tax cuts. The US fiscal debt over $4 trillion and will continue to increase; a tax cut cannot match the intended talk of neutrality.

In summary, bond markets crossed up usual logic and sold off today prior to tomorrow's Fed announcement.  As pricing eroded, many banks revised their rates upward as the day progressed.  It was not a huge move higher, but certainly one that impacted borrowers' cost/credit to get their chosen rate.  Moves like this make me wonder if bond traders have a whiff of tomorrow's Fed statement.  My pipeline is locked.  I would rather lock and potentially lose a few basis points than float and risk a bunch!