Mortgage Rates Positive After Strong Jobs Report

Mortgage rates were surprisingly calm today, especially in light of the fact that the big jobs report was released this morning.  This report has more potential to move rates than any other piece of economic data, though you would not have known it by today's reaction. 

US Treasury market holding very nicely and MBS are slowly following. Debate rages about when the Fed will act, as noted this morning the July employment report cements a move in September - always subject to change but markets expect it now and the Fed is committed to it, so let it fly.

First, the traditional observation. A yield curve flattening in advance of a Fed hike is a stark warning to the Fed. Yield curves flatten in two ways: sometimes short-term rates rise underneath long-term ones, narrowing the spread; other times long-term rates fall down toward short ones. Traditionally the latter, happening now, is the deadly signal.

But tradition is unreliable today. There are three good reasons for capital to gobble long Treasury’s at negligible yield. Overseas investors also derive yield from a rising dollar. Second, any investor anywhere today sees US treasuries as the safest possible investment. Third, the Fed owns a large chunk of outstanding long Treasury paper.

Not much improvement in MBSs today but the 10yr and 30yr treasuries keep moving lower in yield. The 10yr has resistance at 2.14% (2.17% now). The equity market looks very weak, down seven sessions in a row. Selling in equities is moving money to treasuries but mortgage rates are lagging. Although MBSs declined this week by a measly 9BPS, floating has at least kept the door opened for consumers. On the week no real changes in rates, the 10yr about unchanged from last Friday, down 2BPS.

In summary, interesting reaction to non-farm payrolls in the bond market today. The pretty decent report should have sent bonds into negative territory. If you floated into this report, I would float until Monday to see if the rally can continue and to allow time for lenders to pass along the gains.