Mortgage Rates


It wasn’t a good week last week in the bond and mortgage markets; interest rates increased on increasing optimism the US economy can improve even in the face of Europe’s slide, and reduced need for safety in US treasuries. The 10 yr note yield increased 15 bps last week, mortgage rates up 8 basis points; this morning early prices continue to fall as early activity pointed to a better open in the equity market. At 8:30 the 10 at 2.06%, up 3 bp frm Friday’s close, MBS prices at 8:30 -5/32 (.15 bp). At 9:30 the DJIA was expected to pen a little better, it opened down a fraction (-8), the 10 yr note traded at 2.07% +4 bp -14/32; mortgage prices at 9:30 -8/32 (.25 bp).

There are no economic releases this week until Wednesday. The week is focused on the FOMC meeting that starts tomorrow and ends Wednesday with the policy statement. Treasury will auction its monthly ration of $99B in 2 yr, 5 yr and 7 yr notes. The Eurozone of course is always in play these days, any significant comments from leaders of the EU, ECB and IMF will get traders’ attention. Technically, the bond and mortgage markets, after last week’s selling, are now slightly bearish. We talked about how the rate markets were losing momentum for the past two weeks, the break came last week.

How high will interest rates climb is the question now facing investors and traders. We don’t believe rates will increase much, at worst the 10 yr could increase to 2.15% but should hold. On the opposite side, it is very likely that the lows in rates have been put in place. As long as the US economic outlook is imp[roving, and there are no actual defaults in any Euro debt there is little reason to justify the 10 yr under 2.00% and mortgage rates at their lows of a few weeks ago.

Europe’s finance ministers are meeting today in Brussels, trying to advance plans to craft a long-term plan to tackle the region’s debt crisis, as banking and government negotiators continue trying to reach an agreement that will lighten Greece’s debt burden. There has been progress over the past couple of weeks, Greece and private bondholders said they had made progress in talks over the weekend in Athens. Finance Minister Evangelos Venizelos said before today’s meeting that Greece is prepared to wrap up the private-sector debt swap on schedule. “We have a very constructive cooperation with the private sector,” Venizelos told reporters in Brussels. “We are ready to finalize the procedure on time.”

This Week’s Economic calendar:
Tuesday;
1:00 pm $35b 2 yr note auction
Wednesday;
7:00 am MBA mortgage applications
10:00 am Dec pending home sales (-1.0%)
Nov FHFA housing price index (-0.1%)
1:00 pm $35B 5 yr note auction
2:15 pm FOMC policy statement
Thursday;
8:30 am weekly jobless claims (+23K back to 375K)
Dec durable goods orders (+2.2%, ex auto sales +0.7%)
10:00 am Dec new home sales (+1.5% to 320K units (annualized)
Dec leading economic indicators (+0.7%)
1:00 pm $29B 7 yr not auction
Friday;
8:30 am Q4 advance GDP (+3.1%)
9:55 am U. of Michigan consumer sentiment index (74.2 frm 74.0)


The bond and mortgage markets have been losing strength for two weeks as we have indicated in past commentaries. The 10 yr note won’t find much support until it hits 2.15%, now at 2.09%; not much momentary concerns to hold treasuries against Europe. US economic outlook is improving, removing another support for rates. There is some talk that the Fed may announce it will increase purchases of MBSs to keep mortgage rates low, but as long as treasury rates increase the best we can expect is mortgage rates won’t increase as much but will increase. All that said, while we do not expect rates will fall again to the recent lows we are equally not expecting rates to move radically higher.