Mortgage Rates Shifts Higher with Proposed Tax Cuts

Mortgage rates moved higher today as financial markets grew more optimistic about the potential for tax reform.  Late last night, the Senate passed a resolution that included language designed to make tax reform legislation easier to pass.  In a nutshell, it means the Senate only needs 51 votes as opposed to 60 when it comes time to consider a tax bill.

The die was cast before the bond market opened and with MBS closing below our 200-day moving average this day could in fact be the point where "the worm turns" as the bond market has only just begun to actually shift their hedges towards higher growth (Tax Reform) and higher rates (change at the Fed).

That the Senate easily passed the resolution that will open the door to more rapid movement toward tax cuts added more juice to the equity markets. Two months ago, I was unsure that tax deal would happen this year but now it appears more likely it will happen - unless the far right Republicans continue to fight what is a losing fight. The Republican far right is over-reaching in their stand for conservative ideals and not realizing that to achieve their goals they may take down any Republican initiatives when the 2018 elections come around. Notwithstanding the break-through in the Senate, there is still a steep hill to a done deal on tax cuts. One thing though is clear - the cuts when they come will add more to the US deficit and eventually will cause a serious problem - but that is way down the pike from here.  

The bellwether 10yr note at 2.38% approaching the major key technical support at 2.40% - a breach will point the 10yr to 2.62% the highest this year and if that occurs 30yr mortgages will be at or about 4.50%. Based on what I know and not factoring in any potential for geo-political escalations, the only way rates will decline will be a stock market correction.

In summary, bond markets regressed again today, as tax reform momentum built amid chatter on Pres. Trump's Fed nominee(s).  Pricing did not suffer as much as raw bond prices did, but will next week if markets do not rebound.  For nearly a month, I have been locking at application or within 30 days of closing – as there is far too little incentive for rates to drop, and far too much potential inflationary prospects.  I am not changing this and highly recommend others to do the same.