Not A Good Day For Mortgage Rates

It wasn’t a good day for MBS’s or treasuries but the technicals are still holding.  Mortgage rates have now given back some of the gains that were realized from Friday.  The 10yr as noted previously has technical resistance at 1.85% area, but has now failed twice two sessions in succession.  However, until the 10yr rate climbs above 2.00% the bullish technical outlook remains intact. I told everyone to float this morning but at 11:00 the bond and mortgage markets came under pressure on earlier comments from the Fed’s Wm. Dudley and equity markets started to rally. I had never published a second report until this morning to let everyone know what I was seeing with the trades.

What does the Fed know and when did they know it? I muse the Fed does not know now and they never did. This morning NY Fed President Wm. Dudley kept the ball in the air commenting he did not expect any increase in rates by the Fed would be much, he used the word “shallow” defining the potential rate increase. He also fishtailed on when by reprising ‘data dependence’ as the measuring stick. The dollar lost ground to start the week on his comments even with Europe closed today. Back in the day when the economy was booming in mid 2000’s the Fed did not see the housing sector as a bubble, now the Fed does not see a bubble in over-bought equities. What I see is a Fed that is increasingly uncertain about what to do - for all of the bullishness coming from the NYSE and NASDAQ. Most of the main data released so far this year has been less than expected. Weather is the lifeline held by economic bulls now – let us see what April data brings. The Fed is micro-managing a multi-trillion bet that it can save the economy and financial systems, so far so good but now the Fed has a lot less ammo.

Motivation for today's market movements was in short supply.  It certainly was not the kind of day where we have an obvious source of inspiration pushing trading levels in a logical direction.  If anything stands out, it was the huge move in the stock market.  While stocks and rates are, by no means, required to move in the same direction, that sort of relationship is more and more likely to play out when the moves get exceptionally large.  Today's stock market gains were arguably just that.  This can result in bonds being sold to buy more stocks.  Selling pressure in bonds leads to lower prices and higher rates.

In summary, despite weaker than expected economic data today, bonds were unable to hold onto the gains following the extremely weak payrolls report on Friday.  The uptrend in mortgage bond at the moment had not been violated but given the great run they have been in, it makes more sense to lock in now and secure those gains rather than float and risk locking at higher rates or higher closing costs.