Mortgage Rates Facing Volatility - Holding Steady

Yesterday the 10yr note finally made a nice move lower taking MBS prices up 33 bps and the yield on the 10yr down 5 bps to 2.45% after another attempt to push the yield over 2.50% on Wednesday failed. From the economic reports that day, particularly the January CPI, increased as did retail sales exceed forecasts. With the Fed poised to increase the FF rate at the March meeting conventional wisdom would suggest interest rates would continue to increase not decline. Economic growth so far in January is increasing.  It is the first quarter and in the last two years the economy has slumped in the quarter, this quarter promises to be a big change from the past. Inflation is closing in on the Fed’s 2.0% goal - Janet Yellen told Congress this week she was concerned about falling behind and implied the Fed may be ready to move. Every conventional approach about rates would lead to continuing increases in interest rates.

Early this morning the 10yr dropped to 2.40% and MBSs were a positive 28BPs, but now at 10:00AM, we have seen a change where the 10yr is at 2.42% and the MBSs are +10BPS.

Since late December the bellwether 10yr note has been confined in a 20BPS range - 2.30% to 2.50%. The Trump stock market rally, concerns of higher rates and a growing economic outlook and data that implies inflation is getting a toe hold - all of that yet interest rates held exceptionally well. In recent comments, I noted that the pattern was counterintuitive. Since the election when the 10yr traded at 1.87% in the next month the 10yr ran briefly to 2.60% before settling back to its current two-month range. We have continually noted that investors were too optimistic about all of Trump’s plans and the period it would take to implement most of the goals that investors believed were just around the corner. Now we see investors beginning to re-think those highly optimistic goals. With stock indexes making new daily all-time highs the bond market held on - on the surface everything was golden in equity markets but money stayed in the bond market. The outlook began to change on Wednesday when interest rates did not faint over Yellen’s comments.

A variety of factors has tempered economic optimism, including uncertainty over the details and timing of Mr. Trump’s policies as well as concern about developments in Europe, where far-right politicians are expected to put in strong showings in upcoming elections. Europe is increasingly becoming unstable.

Will the Fed move next month? The question of the month now. We all watch the trading on the FF futures for clues as volatility is high now, on Wednesday there was a 30% chance of a March move, yesterday the percentage declined to 17% chance. Looks increasingly as if the equity markets may be losing that unusual momentum since the election last November.

Still a lot of uncertainty and volatility to contend with.  The best bet is to check your risk factor and make the call.  This is not the time to be greedy.