Bonds sold off late last week, and mortgage rates rose. Freddie Mac’s Primary Mortgage Market Survey showed the average rate on a 30-year fixed-rate mortgage rising from 3.41% with 0.5 points to 3.42% with 0.5 points, but the survey is issued on Thursday and most of the responses are collected early in the week. Bonds began to sell off on Tuesday, and as a result, the PMMS does not reflect the increase in interest rates that occurred later in the week. Yields on 10-year Treasuries were around 1.38% on Monday morning, and are currently around 1.56%. Mortgage backed securities have sold off along with Treasuries, although not quite as severely.
Two weeks ago mortgage rates were very close to all-time lows, and there was the potential that we could have seen new record lows set. Now it appears that momentum has swung in the other direction, at least for the time being. There has been no significant change in market conditions (domestic economic data has generally been positive, but the markets really haven’t responded to domestic data in quite a while). Bonds are largely responding to swings in equities, and I think we will continue to see that this week (additionally, it looks like bonds were overbought, and there was some profit-taking and price correction over the past week).
Click here to get today’s latest mortgage rates.
Today’s economic data:
There really isn’t any particularly significant economic data being issued today. Or this week for that matter.
The week that was:
Last week the pendulum swung back in the other direction. Equities rallied and bonds sold off. Equities hit and surpassed pre-Brexit levels. Bond yields have not quite reached pre-Brexit levels, but they are pushing in that direction. Yields on 10-year Treasuries were around 1.70% in the days prior to the June 23rd British referendum, and subsequently hit all-time lows of 1.37% on July 6th (although during an overnight session yields fell as low as 1.32%).
What prompted this reversal? This is overly simplistic, but it looks as though the market over-reacted to the Brexit (at least in the short term – the longer term impact is still very much in doubt). Bonds became overbought, and that realization collectively dawned on the markets, people took profits and put more money into risk assets. I’m sure there are other factors at play here – the potential for more stimulus from some of the world’s central banks is certainly driving some activity – but I think the above is a fairly reasonable explanation for what happened.
It’s worth noting that the probability of the Fed hiking in the coming months has increased somewhat after this week. Some measures of inflation are beginning to pick up (wage growth remains stubbornly low, however), and I’m sure this is playing a part in the perception that another hike is likely this year. The implied probability of a hike in the coming meetings as derived from Fed Fund futures prices:
- July: 0% – down from 1.2%.
- September: 18%, up from 13%.
- November: 19.7%, up from 14.8%.
- December: 46.5%, up from 43.3%.
I’d be remiss not to mention the (suspicious) attempted Turkish coup that occurred on Friday night (our time). It certainly increases the tension and uncertainty in the region, particularly with the mass arrests that have occurred in the wake of the coup. It does not appear to be having any immediate impact on our markets this morning.
Looking ahead:
There are a handful of items of note:
- The Republican National Convention starts today. There are going to be protests, and the potential for an absolute disaster certainly exists. I have no idea how the markets might respond, but the markets don’t like uncertainty.
- The Bank of Japan meets next week, but this week we will hear lots of rumors about the potential that Japan will engage in large scale monetary stimulus, including the issuance of perpetual bonds.
- There is $88 billion in Treasury issuance this week, but $86.6 billion in Treasuries mature, so the impact of any auctions will likely be limited.
- We’ll be keeping an eye on the events in Turkey. Although the market impact seems to be muted right now, if tensions flare, we will almost certainly see money flow out of risk assets. Also worth noting: Incirlik Airbase, which is used by both Turkish and U.S. troops, houses about 50 hydrogen bombs.
Lots of balls in the air this week. We’ll have to wait and see how it all plays out.
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What’s the takeaway for rates this week?:
Great question. I’d like to think that we’ll see rates sit around current levels for the remainder of the week. Right now, the bond sell-off that we saw last week appears to have paused. But it would not shock me at all if we see the sell-off continue and bonds (and mortgage rates) trend back toward pre-Brexit levels. Conversely, there are a lot of sources of uncertainty this week that could cause a bond rally.
While not as low as two weeks ago, rates are still very, very low. If I were looking to get a new mortgage, I would investigate the possible savings now. If it made financial sense for me to refinance, I would do so. Low rates have lasted longer than anyone could have anticipated. Six months ago, I would have never guessed that rates would have tested all-time lows. However, things can, and sometimes do change in a hurry. I would advise you not to sit on the fence for too long.
Don’t wait for rates to rise. Start your mortgage process now.
One more thing:
These 28 pages deserves some attention. Actually, a lot of attention. Their release should certainly should not have been buried on a Friday afternoon in the wake of a terror attack. It’s long been whispered that Saudi officials had some involvement in 9/11. And for a long time, the linked 28 pages of the Congressional report on 9/11 were locked away. Now we have them – in part. We deserve to have them in totality.
Notable events this week:
Monday:
- Treasury auctions
Tuesday:
- Housing starts
Wednesday:
- EIA Petroleum Status Report
Thursday:
- Philly Fed Business Outlook Survey
- FHFA House Price Index
- Existing Home Sales
Friday:
- PMI Manufacturing Index Flash
from Total Mortgage Underwritings Blog http://ift.tt/2anl6TC
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