Mortgage Rates Are Moving Higher

Mortgage rates are moving higher today.  Yesterday, the DJIA declined intraday 104 points, but turned in the afternoon and ended up 5 points, while the other two key indexes hardly moved yesterday. This morning, we are seeing everything on the stock indexes up.  Unfortunately for those looking at mortgage rates – when stocks increase, interest rates then trade higher in yield and lower in price. At 11:00AM, we have the 10yr at 2.38%, and likely will once again test the main near-term support at 2.40%, the level tested and rejected three times since last May. A push above 2.40% likely clears the way (technically) to climb to the high of the year at 2.62% (Dec 15th, 2016) the first and repeated in March this year. MBSs are taking a bigger bath with them showing a negative 29BPS.

Yesterday, the Senate approved the budget resolution for the 2018 fiscal year. The approval paves the way for their tax-cut proposal that would add up to $1.5 trillion to the federal deficit over the next decade to pay for the cuts. Rand Paul, senator from Kentucky, was the only Republican who voted against it, but today added he was “all in” on the tax cuts. The administration has said it would deliver up to $6 trillion in tax cuts to businesses and individuals. Democrats remained united in their opposition to the budget bill and are unlikely to support the Republicans’ tax plan, arguing it would benefit the wealthy, raise taxes on some middle-class Americans and widen the federal deficit. The vote was 51 to 49 with no Democrats voting for it.

It is somewhat of a route in the MBS markets this morning in the increased belief there will be tax cuts after the Senate cleared the way to increase the deficit over the next 10 years.  

September existing home sales were thought to be at 5.30 mil, down 0.9% from August. Sales at 5.39 mil were up 0.7%; yr./yr. sales down 1.5% after being +0.2% in August. No initial reaction to the better m/m improvement over estimates.

The initial euphoria about the Senate approving an increase in the deficit is somewhat weakening - the vote was expected, and tax cuts are mostly already discounted within market stock prices. If there is any question now, it’s whether cuts will increase consumer spending, move inflation higher and whether wage gains will materialize at levels many currently believe. A few months ago, I believed the DJIA would climb to 22K but then turn sour. I cannot fight the reality now, as investors are defying most signs of being overbought, making huge investments that there will not be any major corrections - and even if it happens, it will be seen as a big buying opportunity. Risk of losses in stocks is not even considered.

The stock market and mortgage rates are on the rise so far today, and I expect this to continue. The stock market is liking the passage of the budget and the increasing likelihood of tax reform. However, this is putting pressure on mortgage rates and increasing volatility. Look for this to continue heading into the weekend.