Mortgage Rates at Highest Levels in Six Weeks

Mortgage rates moved firmly up to their highest levels in the past six weeks.  All the focus going into today was on the FOMC policy statement. Q1 GDP this morning was much softer than thought normally would have supported the fixed income markets like MBSs, but was pushed away. March pending home sales was in line with forecasts, also pushed aside by traders and investors. Even this afternoon’s FOMC which was about what had been expected by analysts did not get much response.

So what happened today and yesterday to drive MBS prices down 62 bps and the 10yr from 1.93% to 2.04%? Fundamentally the trigger came from Europe where interest rates spiked higher today on belief the region’s economy is improving after the ECB launched its huge QE program and Mario Draghi saying he would keep it up for as long as it takes to turn the economies higher. Selling yesterday and particularly today broke out of a 30 session range (not calendar days, trading sessions. We noted previously that once the range was violated markets would increase in volatility. Kind of a surprise this morning that US notes and bonds were so weak - partly because there is not much liquidity with central banks holding the majority of sovereign debt.

What the FOMC did today was remove any calendar talk about when the Fed would increase rates. Two meetings ago Yellen was talking future FOMC meetings, “we won’t move at the April meeting, possibly June” (paraphrased). From now on out there will be no reference tied to specific meetings.

Prior to the FOMC statement, Treasury sold $29B of 7yr notes. Not bad, about normal. Tomorrow’s concerns begin in Europe and the interests there - a huge rate decline across most of EU countries added napalm to selling today after yesterday’s jump in US rates. There are interesting data points tomorrow - weekly jobless claims, March personal income and spending, and Q1 employment cost index. 

Always looking at the technical indicators - they have held essentially neutral reads for the last few sessions. Today the 10yr broke out and ended above 1.99% the top of the range. The same chart patterns can be seen in the MBS charts as MBSs follow treasuries. Fundamentally, two things have changed. The dollar is losing ground against other currencies for the last month, and interest rates in Europe are increasing on belief Europe’s economies will improve with the ECB stimulus. The US economy based on Q1 is softening, although most of it MAY be weather related. Markets will not know that until much of the April data unfolds. Trading in treasuries and MBSs is razor thin with less liquidity, exaggerating any movements now.

In summary, we finally got the Fed Statement this afternoon and it was predictably obtuse, with references to economic weakness, but also comments suggesting growth could pick up.  After the smoke cleared, bond markets improved slightly, but we have not recouped any of the prior losses, and rates are near levels last seen in mid-March.  Given this morning's weak GDP data, I would have expected a more robust rally.  For now, I will stay with locking short term and cautiously float those with closings more than 30 days out until we see defined movement towards better rates.  Hope that is soon, but not willing to state the reward is better than the risks.