Mortgage Rates Give Back Gains

Mortgage rates ended up giving back some of its gains from yesterday as there was no follow thru on what was started from Yellen’s comments.  She was at the Senate Banking Committee today re-affirming that the Fed is not quite sure why inflation is not moving higher and growth is stuck at 2.0% and getting it to 3.0% will be a challenge. Lack of productivity as we noted yesterday is one key hurdle that has not increased. The bond and mortgage markets sat still most of the session today.

On Tuesday Fed Governor Leal Brainard led Yellen’s remarks that inflation wasn’t increasing and would likely remain subdued. Yellen added her imprimatur to that view; now joining in on the new thinking Dallas Fed President Robert Kaplan and Minneapolis Fed Pres Kashkari out with similar remarks. Still cannot get over how rapidly the Fed finally got it correct about inflation and slow growth - somebody must have turned on the lights.

Markets were somewhat surprised yesterday that Janet Yellen told the world that the Fed is not as concerned as it was until the last two weeks that interest rates had to move much higher given the lack of inflation and GDP growth. Now in the FF futures markets the probability of a December increase is down to 42% - cannot make much of it now though, it’s a long way to December. Likely the September FOMC meeting will formalize the tapering of its balance sheet but no FF increase.

Senate Republicans released revised legislation that would end major parts of the Affordable Care Act, impose steep cuts on Medicaid, and allow insurers to sell cheaper plans that do not meet the current law’s regulations. Current thinking now is that a vote will take place next week - still kicking the can. Maybe some of the 10 Republicans that were opposed to the previous bill will join in but presently there are still not enough to get it passed, only 2 Republicans can vote against it to pass.  No Democrats are likely to vote for the bill as currently offered. Sen. Ted Cruz of Texas, one of the Republicans that were going to back the previous bill said “It’s very significant progress.”

This afternoon Treasury sold $12B of 30yr re-opening the May issue. The auction was OK and about how the last 30yr auction came in. Tomorrow the key June CPI and the July mid-month U. of Michigan consumer sentiment index.

In summary, right now things are still bearish and you should not dismiss that. We need the 10yr below 2.28% to turn bullish. And that would not get rates out of the woods. Based on 24 hours of market trading rates have not fallen significantly and unless tomorrow’s heavy calendar supports the “new” Fed thinking there is little likelihood of significant improvements interest rates. The bond and mortgage market reactions yesterday was not new buying but traders closing some of the short positions that had built.