Mortgage Rates Seeing a Lot of Volatility - Start Lower Today

Mortgage rates are starting a little bit lower today after we saw a nice move last week in the bond market.  A rally in U.S. government bonds picked up momentum Friday, sending the yield on the 10yr note to its lowest close in almost three months, amid growing frustration among investors at the slow pace of fiscal policy-making in Washington.

I have noted previously here that I do not believe that the issues that have sent stocks to continually higher prices over the last month will happen at the pace investors believe. Tax cuts, fiscal spending, reducing regulations, 2017 growth - all may eventually occur but equity markets presently are too optimistic and overall very over-extended. Last Thursday and particularly Friday that optimistic outlook began to sink in somewhat in the bond market.  Another key reason US rates are holding - the strong dollar pushes foreign nesters to buying the dollar by buying treasuries.

A month ago, overwhelming consensus was that rates were going to increase.  The Fed was set to increase the FF rate two or three times, along with economic growth and inflation were expected to increase. On CNBC, this morning Warren Buffett, he was exceptionally bullish - saying stocks are cheap with interest rates at these low levels and he does not believe a bubble is developing in equities. I will not argue his view when painted on the longer outlook, Buffett thinks in the wider view and does not worry about short term conditions. However, that is what I do I have to worry more about the short-term movements, as I expect a retracement in equities that will keep the near term favorable for mortgage rates and likely will work a little lower from present levels.  Will we see the 10yr push past 2.25, which would lead to the next point of 2.0% - time will tell as I continue to monitor these changes?

After last week's "yawner' of lower level economic releases, we have a very robust schedule with some of the biggest releases of the quarter. We get the 4th QTR GDP but this has already been released once and will probably see a small upward revision, Durable Goods are too volatile for economists to draw any real correlation with economic growth. So, while those are big name reports, the most important ones are the Core PCE on Tuesday, manufacturing data with Chicago PMI and ISM will be key as will Friday's ISM Services reading.  President Trump will address a joint session of Congress tomorrow, Janet Yellen will speak on Friday, and no less than eleven Fed officials speaking (more mumbo jumbo).

January durable goods orders came in with a soft report.  January NAR pending home sales came in lower than expectations, which suggests weak February existing home sales. This setback for resales follows last week's sharp downward revision for December new home sales and together they point to a housing sector where growth is suddenly struggling again. Not sure why we do not get the employment data on Friday – but with no employment data the markets have plenty to chew on this week.

All the technicals are positive now after the improvements on Friday. Fundamentally the bullish optimism remains in the economic outlook and a possible increase in rates from the FOMC on the 15th of March. If you believe that what is happening in the markets rather than Buffett and most every analyst and all investors, that rates will increase then you should be friendly to the 10yr now. Longer term outlooks do remain negative for rates but that is not the case currently. All of that said, it will not be easy to break equity markets and until the retracement begins as rates will not make significant moves. 

Today I expect to see a bit of an uptick in mortgage rates from the move lower last week.  However, at 10:30AM, MBSs have come down in the last hour to a negative 4BPS, and the 10yr has dropped to 2.33% from it open at 2.34%.  Overall, volatility should be relatively high – and to float with a great deal of caution unless closing in the next 15-30 days.