Mortgage Rates--



More selling in the bond and mortgage markets this morning; the 10 yr note at 9:00 -15/32 at 2.34%, mortgage prices -10/32 (.31 bp) frm yesterday’s close. The stock indexes prior to the 9:30 open were up 37 points on the DJIA at 9:00. Feb consumer price index at 8:30 was in line; the overall CPI up 0.4% and the core rate (ex food and energy) up 0.1%, a slightly better read than 0.2% that was expected. The cost of living in the U.S. rose in February by the most in 10 months, reflecting a jump in gasoline that failed to spread to other goods and services. The biggest jump in gasoline in more than a year accounted for about 80% of the increase in prices last month. Yr/yr overall CPI +2.9%; yr/yr core rate +2.2%.

At 9:15 Feb industrial production and factory use; production was thought to have increased 0.4%, as reported production was unchanged. January was revised higher however, from unchanged to +0.4%. Factory usage was thought to be at 78.8%, as reported 78.7%; Jan revision revised higher to 78.8% frm 78.5% originally reported.

The DJIA opened up 26, the 10 yr note -19/32 at 2.35% while MBS prices -12/32 (.37 bp) frm yesterday’s closes.

At 9:55 the last data for the week; the U. of Michigan consumer sentiment mid-month index was expected at 76.0 frm 75.3; as reported it declined to 74.3. The current conditions index increased to 84.2 frm 83.0 at the end of Feb, the 12 month outlook fell from 82 frm to 74 and the 1 yr inflation outlook increased to 4 frm 3.3. The inflation index is the highest since May 2011 and likely a result of the recent increase on oil prices that has pushed gasoline prices over $4.00 in many areas of the country. On the report the stock indexes backed down and the interest rate markets found momentary support.

This week saw interest rates increase the most in eight months. The economy is growing more quickly than was expected a month or two ago and stronger than what the Fed has been thinking, although the FOMC statement Tuesday was more optimistic than at the meeting in January. The outlook for the economy has been increasing recently, driving stock indexes to the best levels since the sub-prime economic meltdown in 2008. Whether or not one believes it based on personal observations is not important, it is what it is based on how the stock market is performing recently. Economic data is reflecting improvement at a faster rate than expected six months ago, as the outlook improves the fear of inflation also has increased.

One major factor that had kept US rates low in the last five months was the safety moves in US treasuries on the debt crisis in Europe; that is no longer a force after Greece got its bailout funds and will avoid default this month. Europe’s crisis however if far from over, but for now it is no longer a factor in the bond market. Another factor that held rates artificially low is the Fed’s constant reaffirmation that it will keep the FF rate at 0 to 0.25% through the end of 2014; the Fed still is saying it but not many are buying it anymore.

It isn’t only in the US that rates are increasing; the German bund is increasing. Like the US 10 yr German rates were trading in a narrow 4 month range, it too has broken out to the upside (yield).

This week has been anything but good for potential home buyers and those that may want to re-finance. Mortgage rates up about 15 basis points in rate on 30 yr fixed mtgs., it isn’t a death sentence however. The Fed remains committed to keep long term rate low, it is more a matter of definition about what low is. Low by the Fed’s definition may be higher than what most had believed; compared to the last 50 years even with the 10 yr note at 2.35% and mtg rates at 4.25% the levels are the lowest in a half a century.

Technically, the near term is oversold in the bond and mortgage markets, suggesting at least some consolidation at current levels or possibly some minor retracements in prices and yields next week. There is support on the 10 yr note at 2.40% and 102.00 on the Apr 30 yr FNMA coupon. The wider outlook however is not so good; we expect the US rate markets will trade in a choppy pattern now through the rest of the year and by the end of 2012 the 10 yr at 2.75%. It is of course a moving target; as long as Europe’s crisis can be contained the outlook is for increased rates, but still by the long term definition rates will remain low.