Mortgage Rates Have Wild Ride

Mortgage rates went on a wild ride today.  Even after the positive data this morning, the mortgage bonds did not really hit stride until Janet Yellen started into her speech, and then they took off in the wrong direction.  However, after much fanfare, they settled down later and recovered much of the knee-jerk reaction to Yellen’s comments to the Senate Banking Committee in semi-annual testimony to Congress.

The 10yr note exploded to 2.49%, but dropped back down to 2.47% and closed there at the end of the day.  After the MBSs hit a negative 41BPS, it closed at a negative 12BPS. Yellen signaled the central bank could consider raising short-term interest rates at its next policy meeting in March and sounded an optimistic note on the economy in testimony to Congress on Tuesday. Yellen spoke bullishly about the economic outlook, cautioning on job growth. March back on the table but trading in FF futures is still not high enough to convince the Fed to move but it is a long way to March 14th, the next FOMC meeting. 

The FF futures were saying just a 13% chance of an increase in March.  After Yellen this morning that increased to 17.7% - still very low and we doubt the Fed would move with that low expectation.

On the question of how she feels about all of the Trump initiatives - she, as well as most Fed officials are in a wait and see mode. On the subject of the Fed’ huge balance sheet: shrinking the balance sheet would result in a tightening of financial conditions. Yellen said the Fed will not start until interest rates are high enough that it has room to cut them to meet the needs of the economy - particularly if it were weakening.  The Fed holds billions in MBSs, Yellen wants eventually to hold just treasuries. 

Tomorrow Yellen goes to the House Financial Services Committee to conclude the semi-annual testimony.

Tomorrow’s data releases will have January CPI, retail sales, NY Empire State manufacturing index, January industrial production and capacity utilization, and December business inventories  and February NAHB housing market index. All-important data.  

I still cannot get behind the bond markets, but I am increasingly thinking the rate markets are headed for a nice improvement in rates. Based solely on my belief that the stock market is headed to a big sell-off (correction) - much overbought and extremely low volatility now suggests complacency by investors that usually leads to a shakeup. Betting on Trump makes sense but betting on all of it happening this year has led to too much enthusiasm. Just my thinking but as I said I cannot move now, as technicals are bearish and as long as the models are negative we have to respect the current conditions.  Right now current conditions in the stock market are like a runaway freight train. Equity markets are rallying around the world led by the US - possibly too much at the moment.

In summary, Yellen's congressional testimony today confirmed the Fed's previously stated goal of winding down fiscal stimulus, including investing in mortgage backed securities.  While the news was hardly a surprise, it did prompt some large movement in bond markets.  We are now near the recent range's top, with treasuries just under 2.5%.  After all the excitement, markets are still looking for motivation, and have not found it yet.  Floating short term MIGHT result in improved pricing, since we are at top of the range, with the emphasis on "MIGHT".