Mortgage Rates Bouncing Upward Off 2017 Lows

Mortgage rates continued higher at a reasonably abrupt pace today as last week's issues are now completely reversed.  What happened?  The ongoing risk-aversion trade given the rising geopolitical tension surrounding North Korea and the economic uncertainty associated with back-to-back hurricanes. 

More selling in the treasury and mortgage markets today, but not as severe as yesterday. Stock indexes exploded yesterday with a strong rally on relief that Irma is now thought to be not as serious in terms of damages as was expected. The UN set more sanctions on North Korea also relieving the momentary tensions that had driven safety trades into treasuries and gold. Today additional improvement in equities and the 10yr note yield increased to 2.17% further damaging the bullish technicals that had been in place for a month. Insurance costs anticipated from Irma were as high as $100B but after the fact revised to as low as $20B to $40B, insurance company stocks are improving, lifting all boats.

Trump said today the latest U.N. sanctions on North Korea were only a very small step and nothing compared to what would have to happen to deal with the country’s nuclear program. Some relaxing now but it is not over.  China is a key.  Rex Tillerson saying if China did not follow through on the new sanctions, “we will put additional sanctions on them and prevent them from accessing the U.S. and international dollar system.”

Treasury sold $20B of re-opened 10yr notes this afternoon, and like yesterday’s 3yr auction the demand was very weak and the auction bidding was sloppy. Demand for treasuries is waning. Tomorrow $12B of 30s will be auctioned – but based on today and yesterday’s 3yr it is likely to be just as soft.

This week’s economic data begins tomorrow with the weekly MBA mortgage applications, and August producer price index.

In summary, bond markets' regression continued today, on the heels of Monday's stock rally and potential tax reform progress.  Bonds' losses were not overly pronounced, but start locking loans less than 30-days, as I do not see a large short term potential for gains here.