Mortgage Rates Moved After Yellen's Speech

Mortgage rates had been holding in a narrow range near their highest levels in roughly 3 months over the past few days.  Despite some stability in underlying bond markets, there was not much in regard to changes with the rates – until today after Fed Chair Yellen's congressional testimony.

Finally, we have the Fed talking about the lack of inflation here and globally. There has been a number of people stating that inflation is not about to increase, but Yellen cannot simply switch the Fed’s inflation worries. She still uses the word ‘transitory’ as her forecast about inflation. The issue is what is the definition of transitory 1 mo?, 6 mo?, 1 yr?, 2 yrs? Using an undefined definition provides a lot of latitude for the central bank. The lack of productivity and stabilized commodity prices, low wages have apparently sunk in at the Fed. In her prepared statement released early this morning it surprised financial markets, as the bond market improved and the stock market shot higher with the DJIA making a new intraday high. She said she now does not believe the Fed will have to increase the Fed funds rate as much as she and other Fed officials have been saying as recently as last week.

Treasury auctioned $20B of 10yr re-opening the May issue. The auction was sloppy. Tomorrow Treasury will sell $12B of 30yr.  June PPI expected 0.0, the core +0.2%. Weekly jobless claims expected at 245K from 248K.

There was very little change in the MBS prices from my report this morning.  We did see a nice move on the 10yr, but it also stopped after the move this morning.  We need a close below 2.28% to flip to a bullish near-term outlook. Although the Fed has apparently succumbed to the idea inflation is not about to increase, and that is a plus for long term fixed income investments, the Fed has more moves than OJ and tomorrow she is back at the Senate Banking Committee for more testimony. I do not discount she may temper her remarks of today. Do not trust the Fed and its lack of ability to see the light.  

In summary, the improvements were big enough to entice risk-averse borrowers to lock in the gains.  From a momentum perspective, more risk-tolerant borrowers might feel a bit more optimistic about interest rates generally finding a ceiling at recent highs, but risks remain, both from the rest of this week's data as well as next week's European Central Bank announcement.  Bottom line – there is slightly more reason to be optimistic, but it is not quite time to abandon caution in light of the recent rate spike.