Mortgage Rates Take Off

Mortgage rates took off following today's rate hike from the Fed.  It was not the rate hike itself, however, that markets find most troubling.  The Fed did what was expected, increased the FF rate by 0.25% to a range of 0.50% to 0.75%. The policy statement was about in line with what we expected.  The headline, if you want to believe it - the Fed is thinking three more rate increases this year. Last December the same Fed was telling us four increases were being considered.  There was only one and that was last December and the first increase in 10 years. I respect the Fed but do not take it seriously when it comes to the long run forecasts or the interpolation that permeates the policy statement. Janet Yellen and the other Fed officials constantly talking about inflation just around the bend - but the Fed itself does not expect inflation to reach its 2.0% goal next year. Regardless of the Fed forecasts, the Trump expectations continue to push yields higher, and we saw the 10yr close at its highest level at 2.57%, with MBSs loosing 79BPS.

Janet Yellen made it clear she and other Fed officials are not going to step in front of the markets or how markets are assessing the Trump presidency. Answering a question, she reiterated that the Fed must maintain its independence. Trump and other Republicans have commented on reining in the Fed - not a good idea, the Fed should always stay independent.

Stocks rolled down today frustrating CNBC regulars - at one point down over 160 points, then in the last 30 minutes rebounded a little and that was Pablum for CNBC panelists. Amazing that some pull back is seen as a crisis. Stocks were overbought and one trade rule that should not be forgotten - buy the rumor, then sell the news. One of CNBCs panel painted the minor selling in stocks as a reaction that the Fed is talking three rate increases in 2017 instead of two. Last year it was four increases, as it played out, just one. As usual comments about the FOMC cover the gamut. Take a breath people, there was nothing in Yellen’s press conference or the policy statement that could be a shock or surprise. Way too much focus on the Fed, but Pavlov’s Dog always wanted to come back for more.

The 10yr this morning traded at 2.43%, now 2.58%. The reason will be the Fed but higher rates were expected.  The technical indicators went bearish back in early October and have never changed.  Not a surprise, a surprise would have been a decline in rates. The 10yr note at 2.53% has an open field now to 3.00% and mortgage rates are likely to move above 4.50%. Sticker shock for the not so old, us old dudes know the historical norm at 6.0 to 7.5% for 30yr fixed mortgage rates. Even the old dudes are somewhat shocked after the lows in the last couple of years.

In summary, this hike was expected, but all this fuss is not because of the Fed hiked.  This is a reaction to the shift in rate hike expectations among Fed members.  It means they are having a Matrix-eque moment where they're "starting to believe."  In this movie, the belief is not about Kung Fu and dodging bullets, but rather about the ability to continue gently raising rates.