Bonds got beat up again last week. Yields on 10-year Treasuries began the week around 1.75%, rose as high as 1.88%, and are now hovering around 1.84%. Mortgage bonds followed suit, and by the end of the week, mortgage rates were close to five month highs. The sell-off impacted bonds globally, and was the largest retreat in bond prices since 2013. The root causes for the sell-off were better-than anticipated domestic economic data, signs that inflation is picking up, and the anticipation that central bankers will begin to tighten monetary policy in advance of nascent inflationary pressures. Will this trend continue this week? More after the jump…
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The rate outlook:
In no particular order, the most likely influences on the market this week are likely to be the U.S. jobs report on Friday, the Fed meeting that concludes on Wednesday (the Bank of Japan, Bank of England, and Reserve Bank of Australia also meet this week), and of course, the interminable slog that is the U.S. Presidential Election.
- The chances of a hike at the Fed meeting this week are low. The prices of Fed Fund futures imply just a 6.2% probability of a hike. The implied odds of a hike in December are 73.3%. It was always very unlikely there would be a hike in December due to the proximity to the U.S. election and the Fed’s desire to be seen as apolitical. I don’t think we’ll see a great change in the Fed statement itself. The rise in yields over the past few weeks is due at least in part to a December hike being baked into the price of bonds. The Fed doesn’t really need to prepare the market or commit itself to a hike in December, as the market already expects it.
- I don’t have a good feel for what the other central banks will do, but if any of them appear to be ready to reduce stimulus measures, we are likely to see yields continue to climb. It’s worth being aware there is some risk here.
- The October jobs data is probably going to be somewhat of a non-event, given that a rate hike is widely anticipated in December. Unless we see a truly terrible or outstanding print, I doubt the markets’ perception of the probability of a hike in December changes. The consensus expectation is for +178k jobs, and a slight bump in average hourly earnings.
- That brings us to… the election. The polls seemed to have narrowed after the most recent email revelations, particularly in several battleground states. Hillary Clinton is still the odds on favorite to win the election. That said, the unanticipated outcome of the Brexit vote is still fresh in everyone’s memory – as is the collective freak-out that happened in its wake. From a market perspective, I think it is fairly safe to say that a Hillary Clinton presidency represents a continuation of the status quo, whereas a Donald Trump presidency is a complete unknown. So even if there is a small chance that Trump wins, that possibility, and the complete uncertainty that follows should be weighing heavily on the minds of all market participants.
- Last thing about the election – as you likely know, Trump has not said that he will accept the outcome of the election if he does not win. Come November 9th, I don’t know that the outcome of the election will be settled. If we get into some kind of Bush-Gore 2000 situation, but with only 8 Supreme Court members, I have no idea what will happen. It probably won’t be good for anybody, though.
So what’s the takeaway? Rates have been trending up since mid-summer. Barring something unexpected, we will likely see rates continue to move higher as inflation gets returns to normal and the Fed tightens monetary policy. Lots of assumptions in that last statement, but I think that is the most probable scenario. I’d advise people shopping for a mortgage to attempt to lock down a rate sooner rather than later.
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from Total Mortgage Underwritings Blog http://ift.tt/2eMtHUp
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