Mortgage Rates Not Catching a Break

Mortgage rates cannot catch a break.  They are not much higher than yesterday, but yesterday was already the worst of 2015. Today clearly showed how bearish the US interest rate market is - and more clearly demonstrated the additional weakness in MBS markets - kind of like there is no demand for MBSs. The 10yr note closed at 2.29% today and MBS was again down 21 BPS.   This morning’s retail sales and soft import and export prices led me to believe that prices would hold better today. This afternoon’s 10yr auction was as strong an auction I have seen in well over a year - the bond and MBS markets looked at it then resumed selling.  A gauge of foreign demand for the $24 billion auction hit a multi year high, while overall demand rose to the highest level since December.

I have cautioned recently that volatility would increase and be excessive - however, I did not think it would be this serious. The economic outlook overall has not changed, as there is still little consumer demand even with the improvement in March retail sales. It is unlikely this increase in rates can be laid on the idea the US economy is about to fire up. It started in Germany, led to other rate markets and now for the moment no one appears to want US debt - except those that bid the 10yr this afternoon. People in my line of work are not supposed to be blind-sided but this one certainly caught me flat-footed today.

Tomorrow weekly jobless claims and April PPI both will start the morning’s reports with a Treasury auction of $16B new 30yr bonds. 

But the usual reaction was nowhere to be found today.  Granted, there were brief, token movements in financial markets in logical directions, but they were quickly overwhelmed by the pervasive momentum that's been leading us toward higher rates for the past several weeks.  This sort of paradoxical movement is almost always at that scene of the worst moves higher.  This move hasn't quite entered the same territory as late 2010 or mid-2013, but it's the worst we've seen since then.

In summary, what a disappointing day.  Just when you think the tide might be shifting toward lower rates, they fade.  Despite weak economic data here and abroad and an outstanding auction of 10yr notes, rates which started the day in better territory have given back all the gains.  We do have our final treasury auction for the week tomorrow and it is quite common to see a rally once all the supply has been absorbed...however the trend is still not our friend.  This is starting to feel a lot like 2013 when rates shot higher.  Should the 10yr yield close higher again tomorrow things could get much worse.  Risk reward favors locking – and I am heading back towards that direction to my clients.