Mortgage Rates Volatility Up - Increased Tensions Between US and North Korea

Mortgage rates are moving lower so far today, in all respect to the rhetoric increased between North Korea and President Trump. All talk now, and the intensity of it suggests tensions are increasing, but it still seems highly unlikely either country is anywhere near action. Nevertheless, as we have noted, the tensions and the lack of any concerns presently about inflation increasing have underpinned the US bond market, thus supporting mortgage rates. For over three weeks, no real change in mortgage rates or the 10yr note. This morning, a nice price improvement and lower yield on the 10yr.

I believe that interest rates will continue to improve only if the stock indexes finally decline in a long-overdue technical correction and the North Korea uncertainty continues. The lack of inflation fears in the near term removes a major impediment for long term fixed rate assets. That said, there is an increasing belief among inflation hawks that inflation increases are close to beginning to increase. That view is founded on the belief that the global economic growth will continue. I do not completely buy that at the moment.  Yes, Q2 earnings have been solid, but I do not expect Q3 earnings in stocks in the US and globally will be able to match Q2’s strong performances.

Weekly Mortgage Applications increased by 3.0%. Refinance application jumped by 5.0%, Purchase Applications were up 1.0%.

Q2 preliminary productivity and unit labor costs were released this morning. This was a mixed bag for MBS. First, this is old data that compares the change from the first quarter to the second quarter. MBS traders are more focused on what will happen in the 4th QTR. Non-Farm Productivity was stronger than expected. Anytime you can produce more without rising costs - that is anti-inflationary and very bond friendly. Unit Labor Costs increased but by only half of the market expectations. So, all of that is positive for MBS. However, the 1st QTR Unit Labor Costs were revised upward significantly - which means two things: 1) That this data may also be revised higher and 2) this reading would have been a big time beat to the upside without the prior revision. No inflation fears in this data.

June wholesale inventories were expected to have increased, and it did even more than anticipated.   

This afternoon, a key Treasury auction where $23B of new 10yr notes will be auctioned. With the 10yr note at very key resistance levels this morning (2.22%), the demand will be closely observed. US 10yr yields still a lot higher than other key sovereign debt (German 10 yr. bund 0.42%, France’s 10 yr. OAT 0.71%, UK 10 yr. gilt 1.09%). Yesterday’s 3yr auction was met with good demand.

The bellwether 10yr at its resistance level at 2.22% and has gapped lower from yesterday’s 2.28% level. There seems to be no concerns though so far - pundits, money managers and hedge funds still betting on higher stock prices and higher interest rates. Cannot argue too much, but remind that every major turn in markets is built on excessive optimism that a trend will continue. Also, a change in the direction of any market begins with near term technical analysis.

In summary, mortgage rate volatility has just spiked due to increased tensions between the US and North Korea.  Look for mortgage rates to continue to see pressure on the downside for as long as the rhetoric continues.