Mortgage Rates See Another Increase

Mortgage rates saw another increase today, the 7th sessions out of 8 that interest rates have risen.  The 10yr has gone from 1.92% to 2.24%, MBS prices have declined 191BPS since April 28th. After 30 sessions in a very tight range, as we noted when the range was still intact, when it broke it would be a huge and swift move in the direction of the break-out. At that point I along with a number of other economists were still slightly bullish for a break to the downside in interest levels. We were wrong, the break was for a rapid increase in rates.

Economic data and inflation readings recently have increased in the last two weeks of reported reports from Europe and the dollar’s rally has faded. The decline in the dollar, increasing oil prices, stronger growth projections in Europe, China’s outlook still soft but seeing a little more optimism. All combined with historically low interest rates; to drive rates lower than the tight range from March 18th to April 29th the economic outlook here and in Europe would have had to be weak, they have not.

Janet Yellen said today risks to financial market stability are moderate at the moment although stock market valuations appear somewhat elevated and some bond and loan markets suggest investors may be taking excess risks.  A big uproar from bullish economists, traders and analysts that the Chair of the Fed should not be commenting on market levels. Greenspan and Bernanke both stayed out of it - Greenspan’s comment that he could not project a bubble still rumbles in the housing sector where the bubble was obvious to anyone that understood mortgage underwriting 18 months before the bubble took US and global economies down for years and still have not recovered that understood mortgage lending.

I mentioned yesterday and today that the near term technicals are very over-sold. Still the case but at times markets do not give it much interest. I am going to a lock mode and suggest keeping locked.  You have heard it before numerous times - never fight the market action. Employment on Friday - unless job gains are extremely weak against expectations it is unlikely rates will drop much. Most concerns now have shifted to inflation gains and better outlooks from Europe and China. If interest rates have any chance for big move lower in rates it will take a major decline in US and global equity markets. So far this year any decline in stock indexes has led to a rebound. Based on the indexes the stock market is mostly flat this year.

In summary, there was a lot of selling going on as both stock and bonds once again got clobbered.  The market appears to have disregarded the bad ADP number today and is positioning themselves ahead of Fridays NFP number.  I can see this as a better than expected number may already be priced into the market and if that is the case rates truly should not increase to much higher.  On the flip side if the number disappoints we may have a nice rally on our hands.  This leaves floating the best course of action from a risk/reward perspective.