Mortgage Rates Moved Higher Ending the Downturn

Mortgage rates moved higher for the first time this week, thus ending the string that we were seeing for the past several weeks. Today's rates are roughly in line with those seen on November 3rd. The bounce back in bond markets was what I discussed yesterday as I feared that this might just happen – and it did.  Even though the changes were very small, it was a change in the wrong direction.

Tax reform continues to be the story to watch.  MBS have not sold off on a bevy of very strong economic data because the bond market has been hijacked by the Tax Reform story.  The Senate Finance Committee Chair Orrin Hatch released the Senate's updated Tax proposal.  It had several key differences from the House Bill:

• 20% permanent corporate tax cut delayed by 1 year
• Complies with the $1.5 trillion cost (will cost $1.44 trillion)
• Preserves 7 tax brackets: top tax bracket is 38.5%, down from 39.6%
• Doubles standard deduction from $12,700 to $24,000 (married couples)
• Ends state and local tax (SALT) deduction; keeps business deduction
• Keeps the mortgage Interest deduction cap at $1 million
• Preserve the estate tax, doubling the current $5.49 million exemption for individuals
• Raises the child tax credit to $1,650 from $1,000
• Sets 10% tax rate for US companies with IP in foreign low-tax jurisdictions
• Full expensing of capital investments for five years
• Preserves 401(k)s IRAs
• Sets repatriation rate at 12% for liquid assets, 5% for illiquid assets
• Carried interest loophole unchanged
• Electric Vehicle tax credit is spared

The 30-year bond auction was nothing special.  $15B went off at a high yield of 2.801% which was better (lower) than last month's auction at 2.870%.  But demand was soft. On Deck for Tomorrow - FNMA Monthly Coupon Rollover, Michigan Consumer Sentiment. 

In summary, bond markets endured a challenging day today, as uncertainty on proposed US tax reforms and ECB bond purchasing tapering details befuddled traders.  Despite the unknowns, MBS were virtually unchanged by early PM.  Looks like our day to day swings will be negligible until actual details on tax reform are determined.  With rates near their best since mid-October, it is a great time for risk averse borrowers to pull the rate lock trigger.