Mortgage Rates Continue to Climb - 10yr Treasury at 2.50%

Mortgage rates continued higher today, largely due to momentum in bond markets carrying over from yesterday.  Trading was far less active today and the movement was much smaller.  Even so, any amount of additional weakness would have been enough to confirm a shift in what had been an exceptionally flat rate range over the past 3 months.

The tax cuts are baked in the cake now, as both Houses voted it, Trump held a get together, Republicans happy campers. All’s good in Washington. Now the proof is in the eating, will all the promises touted be realized in 2018? A lot of us hope they will but it is not a slam dunk yet. One thing we will not like is that mortgage rates in 2018 are likely to increase. The prospect of a tax cut has raised US stocks in absolute and relative terms. A US fiscal stimulus should, all else equal, lead to higher rates next year. That means higher rate differentials, and therefore a stronger dollar. The more the tax cut acts as a stimulus, or is perceived to do so, the more it will raise bond yields. It is already popular to predict that 10yr Treasury yields will hit 3 per cent next year. The President is not expected to sign the bill before Christmas but there has been no official announce when.

Now that it is over, how will the equity markets react through the remainder of the year?  Likely some selling in the indexes.  The 10yr has increased from 2.32% to 2.50% in the last four trading sessions taking the short term 9-day relative strength index approaching overbought levels. That is not a green light for any major improvements in mortgage rates, but we cannot ignore the potential for consolidation at these levels. If there will be any noticeable improvement in rates, it has to be on the back of an equity market sell-off on profit-taking. Presently the economic bullishness within markets is excessive, as if nothing will curtail stronger growth and higher wages in 2018. Buy the rumor, sell the fact?

Tomorrow likely to be the last day with a full complement of traders and investors. Present economic conditions still get focus but with the tax cuts ahead any weakness in data from forecasts is not likely to have a major impact on markets as markets now aiming at 2018 and with high optimism. Friday though does have two key data points that will get attention - personal income and spending with the inflation PCE and Nov durable goods orders. New home sales also on Friday.

In summary, bond markets continued yesterday's sell-off, albeit at a slower pace today.  As yearend nears, seems quite apparent that investment firms are rotating into stocks at bonds' expense.  I do not foresee a quick bond bounce back.  There is always a bit of uncertainty when it comes to market movement in the 2nd half of December.  Markets will not really be firing on all cylinders until the 2nd week of January.  All we can know for now is that a sideways trend has given way to new trend toward higher rates.  It will take significant improvements before abandoning that outlook.  As such, floating one's rate makes even less sense than it did before.