Mortgage Rates Not Holding Gains

Mortgage rates are moving higher so far today.  The MBS market improved again yesterday as we had seen this increase for nine of the past ten days.  We have been seeing light volatility as of late as there was another technical failure for the 10yr. 

Yesterday and Tuesday the 10yr yield declined from 2.42% to 2.34%, as this looked good with decent buying for a hedge against the potential of a stock market decline. Stocks are now under a microscope about the present levels and the future of the economy under the Trump policies and plans. Prices exploded on the assumption of a quick tax cut, reduced regulations, and a re-do of the ACA. Now investors face the decision of how long these ideas will take to have an impact on the economy and business growth. The rally has been driven by expectations of more aggressive, inflationary fiscal spending and large-scale corporate tax cuts, which benefit smaller, largely-domestic companies that cannot lower their effective tax rates through overseas legal subsidiaries. Moreover, they are largely insulated from the stronger dollar. That sector is in danger of declining now with the prospects of quick fixes slamming headlong into reality that nothing moves quickly in Washington.

Inflation fears have ebbed the last few days.  With the lackluster wage growth, there now is doubt over the likelihood the Federal Reserve would tighten policy when it next meets. That has brought into question the March FOMC meeting and whether the Fed will move. Talk is still three moves this year, but I only look for 2 increases. Yellen will assess inflation and find it wanting.

Jobs continue to increase as this morning weekly jobless claims were thought to be up, but dropped to the lowest level going back to 1973 according to analysts that look back that far. The 4-week smoothing averages declined from 248K to 244.25K. The decline implies that the jobs market has continued to firm, even as the unemployment rate has remained at or near levels consistent with its natural level as more people enter the work force.

St. Louis Fed’s Bullard saying this morning that he doesn’t think Trump polices will overheat the economy this year and that no inflation pressures are presently building now. Generally, what we have said above. Bullard is not an FOMC voter this year. Last year Bullard altered the way he forecasts the economy and predicted the federal funds target rate would stay below 1% through 2019.

We just had December Wholesale Inventories come in as expected.  This afternoon, we will have the Treasury selling $15B of new 30yr bonds.  Yesterday’s 10yr auction was soft and sloppy, and the markets did react, but continued their positive direction.

The key 10yr note yield, as it is at 2.38% after it closed yesterday below the floor that we had hoped would hold.  Looking at the movement in stock indexes, oil prices and keeping both eyes on the situations in Europe, I cannot get my arms around the present levels, but at 11:00AM, I do not like what I am seeing in the MBSs down 24BPS, and even though the 10yr is just a tad up, lock in these gains we have seen if you are closing in the next 15days, and you might want to consider the same if you do not want to get into a storm.