Mortgage Rates



A better start this morning after the huge sell-off yesterday after the FOMC minutes implied the Fed would not initiate another easing move (QE 3) unless the US economy back slides. Never say never and never say always, a traders mantra. While another easing is presently off the table it is not buried yet; the Fed is still somewhat concerned that the economy isn’t yet completely out of the woods. That said, the economy is improving slowly, but it is growing; in the minutes yesterday it was noted the Fed will likely increase its forecasts of GDP growth from the estimates released in January. Taken together, the Fed’s continuing “promise” to ease further if the economic outlook declines and the Fed’s increasing optimism that the economy is improving slowly; to expect another easing has to be founded on belief that the economy will weaken.

Will interest rates continue to move higher? The question for the moment; as we have noted many times here we do not expect rates will increase much frm present levels as long as the Fed funds rate remains at zero to +0.25% as Bernanke continues to imply; there is little reason to expect a major spike in longer term rates (mortgages). The 10 yr not has strong support at 2.40%, yesterday it closed at 2.29%. On the other side; will rates fall back to levels seen in Feb with 30 yr mortgages under 4.00%? That is highly unlikely as long as there is not another crisis in Europe on its debt mess. It was Europe’s crisis that sent US interest rates to the lows from Nov to early March, not US domestic issues.

At 8:15 ADP released its numbers on non-farm private jobs; estimates were for an increase of 210K area, as reported ADP said job growth increased 209K. US stock indexes were already lower on yesterday’s FOMC minutes and didn’t improve. The stock market declined yesterday, this morning the indexes are opening weaker. Stock markets have been expected to correct after the recent strong gains; from what we hear even the most optimistic analysts were looking for a pull-back.

The European Central Bank left interest rates unchanged as policy makers balance the threat of inflation in Germany against the need to fight the sovereign debt crisis. ECB officials meeting in Frankfurt today kept the benchmark rate at a record low of 1.0%, as predicted by all 57 economists in a survey conducted recently. President Mario Draghi holds a press conference at a 2:30 p.m.

At 9:30 the DJIA opened -110, NASDAQ -31, S&P 500 -12. The bellwether 10 yr note +15/32 back to 2.24% -5 bp frm yesterday’s close. 30 yr MBSs +11/32 (.34 bp) frm yesterday’s close.

At 10:00 March ISM service sector index, expected at 56.9 frm 57.3, was at 56.0. Sub-components, new orders at 58.8 frm 61.2, prices index 63.9 frm 68.4, employment at 56.7 frm 55.7. Indexes over 50 indicate expansion. There was little reaction to the fractionally weaker data; the stock market already off substantially and the bond and mortgage markets rallying.

After the sharp sell-off yesterday in the bond markets we can expect interday volatility to be high for the next week or so as investors and traders assess the impact that it is now unlikely the Fed will ease again. Technically, the 10 yr note yield is pointing to a little higher rates with key support at 2.40% and strong resistance at 2.20%; MBSs and mortgage rates also in a 10 to 15 basis point range for 30 yr rates. Today the stock market started weaker aiding a nice bounce in the bond and mortgage markets. For over 30 years interest rates have been declining, the long bull market is ending. We still hold rates will not increase much through the rest of the year, but they will move up. Take full advantage of where rates are today and move on any rallies to lock in these low rates. The only thing we can see on the horizon that may drive long term rates lower would be Europe’s debt crisis resurrecting with the potential of defaults increasing again.