Mortgage Mike’s Daily Rate Commentary

As anticipated, the Fed left interest rates unchanged and will begin the process of reducing their balance sheet beginning in October.  Quantitative Tightening, as it has been branded, is essentially the unwinding of the massive Quantitative Easing program that helped drive mortgage interest rates lower in recent years.  Now that the program will be unwound over the coming years, this will add upward pressure to mortgage interest rates as the markets work in reverse of what we had become accustomed to.  However, the good news is that it will be a controlled and slow unwind that should reduce the $1.8 trillion of mortgage bonds the Fed now has in their portfolio over the coming seven or more years. 


If the U.S. economy performs as the Fed anticipates, most Fed members believe we will see a rate hike in December, followed by three more in 2018.  This is a slower pace than original anticipated.  However, given the stubbornness we have experienced with slowing inflation, even this may be overly aggressive.  The Fed needs for the Fed Funds Rate to be higher so they can reduce rates when we hit the next recession in the United States, which is now overdue.  Given the typical economic cycle, we would anticipate a slowing in the stock market as well as the employment market as they begin to restrict.  Although this sounds completely unlikely given the current economic strength, there are many triggers that could lead to a recession in the coming year or so. 


Mortgage bonds have broken beneath a critical layer of support and continue to fall.  Unfortunately, we are seeing mortgage interest rates inch higher.  As a result, we will maintain our ongoing locking bias. 


Markets have been relatively flat this morning, as investors wait for the outcome of the Fed meeting that concludes today at 12:00 pm mountain time.  Following recent news of much higher than anticipated import and export prices, the odds of a rate hike when from very little to a hike being on the table.  We feel a rate hike would have a damaging impact at this point, so we still feel the Fed will pass on a hike.  We also believe the Fed will announce the beginning of Quantitative Tightening.  Overall, with the Fed not hiking, and QT being announced, this could be a negative event for the near-term direction of mortgage bonds. 


Bonds have been riding along the bottom of a sideways trend line.  They have also hit the far side of a downward trading channel.  The good news is that if markets respond positively to the Fed announcement, we could see bonds break out of the downward trend in which they have been trapped for the past couple of weeks.  However, if markets react negatively to the Fed statement, we will see the downward channel intact, which will mean interest rates will likely take a step higher.  We will have a much clearer picture on the near-term direction of mortgage interest rates tomorrow. 


Given the continued weakness, and the potential negative reaction to the Fed announcement, the safe play will be to maintain a locking bias. 


What happens to the U.S. stock market when the President of the United States verbally threatens to destroy another country and its citizens?  Well, stocks hit new all-time high record high levels. This seems to be an interesting response, given the increasing likelihood of a military strike involving North Korea in one way or the other.  If this were to happen, stock investors would then be quickly moving out of stocks and likely into the safe haven of government notes and mortgage bonds.  However, as we wait to see what happens, the stock market will continue to show irrational judgement and extend the winning streak a bit longer.


Mortgage bonds remain trapped between their 25 and 50 day moving averages. This well-defined channel could help provide a bit of stability, which is a welcomed sign after the losses bonds endured the past two weeks.  As long as the 50 DMA holds, bonds can take the time needed to decide which direction they will head next.  Tomorrow afternoon will be the Fed announcement of interest rate decision and Fed policy going forward.  Although the Fed will not be increasing rates, we feel there remains a good change they will announce Quantitative Tightening.  This could cause panic in the bond market, leading to another step higher in interest rates.


Given the risk of the bond market acting adversely to tomorrow’s Fed announcement, we will maintain our locking bias.

Stocks are setting new all-time high records again this morning. Given that there is very little for stock investors to be celebrating, this improvement is largely a continuation of the improving momentum. This is again putting upward pressure on mortgage interest rates, which have had a rough couple of weeks.  If the yield on the 10 Year Treasury Note steps up to the 2.25% level, we could be in for a more dramatic increase in interest rates.  With current levels at 2.225%, there isn’t much room before yields hit this critical level.  Considering that yields were at 2.03% less than two weeks ago, it’s easy to see why mortgage rates have also moved higher.


The Federal Reserve will be meeting this week, with the interest rate and policy announcement set for Wednesday. Although the Fed will not increase short term interest rates, it will likely be the point at which Quantitative Tightening will be announced.  Although the Fed will now be an active seller of mortgage bonds, they will not be reinvesting all the income they have been putting back into the bond market.  This will reduce the demand of money going back into the bond market, which will help drive the price of mortgage bonds lower.  This will create upward pressure on mortgage interest rates, making now the time to either purchase or refinance.


We are hopeful that the 50-day moving average will hold. However, we will continue to maintain a locking bias.

Kim Jong-Un is at it once again.  This time, the Pyongyang regime launched a second ballistic missile in less than a month over Japan.  The missile they tested flew far enough to put the U.S. territory of Guam within range.  This came shortly after Kim Jong-Um threatened to take out Guam.  It seems this missile test was a show of proof that they had the capability to make this happen.  Stock investors seemed to shrug off the latest move by North Korea, which is a sign they are becoming used to such actions.  Personally, it feels as if the provocations will eventually need to be dealt with in one way or another.  This could very easily become a larger issue, at which time the stock market will not likely be prepared. 


Mortgage bonds continue to fall, as stocks remain near record-high levels.  The weakness within the bond market seems to be further fueled by profit taking as bond holders took advantage of highs not seen in more than 10 months.  With prices now beneath their 25-day moving average, the hope is that the 50 DMA will continue to hold.  If stocks are able to finally take a break from this run higher, we could see bonds benefit.  However, they will need to break above their 25 DMA to see any reasonable gains. 


Given the continued weakness in the bond market, we will maintain a locking bias.

Stocks are down slightly and mortgage bonds are close to unchanged levels this morning.  Bonds fell to test the days moving average in early trading this morning and have since recovered their losses.  It’s a great sign to see the DMA hold, as a break below this critical level would be a terrible indication of further losses ahead.  If bonds can hold their ground, we could see some strength build up.  However, it’s too early to make that predication at this point.

 The Consumer Price Index (CPI) report for the month of August was released this morning.  Since this measures inflation on the consumer level, it’s considered a critical report for mortgage interest rates.  As expected, inflation levels increased 0.4% for the month.  The year-over-year Headline number also rose from 1.7% up to 1.9% on a year over year basis.  However, when subtracting food and energy prices, the monthly rate increased only 0.2%, with a year over year increase of 1.7%.  Given that this was higher than the 1.6% rate anticipated, this was not a friendly report for mortgage interest rates. 

 There remains an undercurrent of weakness in the bond market.  We will maintain our locking bias.   


The bond market continues to slide, as all-time high levels in the stock market suck money out of the bond market in search of higher returns.  Bonds are now at a pivotal point, with the 10 Year Treasury Note yield pressing up against the ever-important 2.18% level that it fought to break beneath for many months.  If this level fails to hold, we could see the 10 YTN yield take a more significant jump higher.  This will also hurt mortgage bonds, as the two competing investments tend to move in sync with one another.  Mortgage interest rates would take a step higher as a result. 


The Producer Price Index (PPI), which measures inflation on the wholesale level, was reported to be up 0.2% for the month of August.  Although this was lower than the 0.3% anticipated by the market, it is still a strong increase.  On a year-over-year basis, the number moved higher from 1.9% to 2.4%, which is only 0.1% away from matching the quickest pace of inflation since 2012.  Most of the gains in this report can be attributed to higher energy prices.  Since PPI doesn’t necessarily mean higher inflation on the consumer level, the market’s reaction was minimal.  Investors will be waiting for tomorrow’s Consumer Price Index (CPI) report, which could certainly influence the near-term direction of mortgage interest rates.


In the face of continued weakness in the bond market, we will maintain our locking bias. 


Stocks are again setting new all-time high records, as investors continue to ignore the on-going threat of military action with North Korea. Yesterday, NK’s leader, Kim Jong-un, warned of retaliation if the UN Security Council approves a plan to impose more harsh sanctions against North Korea.  The state-owned Korean Central News Agency, citing a statement from the country’s Ministry of Foreign Affairs, released the following: “The forthcoming measures to be taken by the DPRK will cause the US the greatest pain and suffering it has ever gone through in its history.”   Shortly after, it was announced that the sanctions against North Korea were approved.  Therefore, we can anticipate further retaliation from Kim Jong-un.  As a result, I anticipate that the US stock market will lose steam and commentators will cite North Korea as the reason.  We will have to wait and see at what point stock investors realize the irrationality of the market being at current levels.

Mortgage bonds have broken beneath their 25-day moving average and seem poised to soon test their 50 DMA. This fall will essentially wipe out weeks of improvements we have had in mortgage interest rates in just a matter of days.  As we often see, once bonds break below a channel, they tend to fall sharply.  Hopefully the 50 DMA will hold.  If it doesn’t, bonds could experience a long drop towards their 200 DMA.

There seems to be very little to celebrate in the bond market. We will maintain our locking bias.

The negative pattern identified in Friday’s market update appears to have been accurate as mortgage bonds are down sharply.  The short-term memory of stock investors is once again proving true, as stocks are now making a run towards setting new all-time highs.  This comes as both Texas and Florida are assessing the damage from hurricanes that devastated thousands of homes, businesses and communities.  The amount of damage caused will prove to be near the top of natural disasters in our nation’s history.  However, stock investors don’t seem to be concerned.  Once again, showing a level of ignorance and irrational exuberance that is hard to fathom. 


Mortgage bonds have now broken beneath the trend line and are now heading towards the 25-day moving average where they will hopefully find support.  However, if this level does not hold, they have a bit to go to until they hit the 50 DMA.  Either way, we are in for a bit of an increase in the price of mortgage loans at least in the near term. 


Given the continued weakness, we will maintain our locking bias. 


Mortgage bonds are lower and stocks are climbing higher this morning. It’s a slow economic news day, so markets will trade heavily based on the technical outlook.  From what I can tell, bonds are showing signs of a negative reversal.  This is a bad sign for the near-term direction of mortgage interest rates. Given that bonds have been on a strong tear higher for many weeks, this move is now due.  If this is right, we can expect to see mortgage interest rates trickle higher over the coming days.


With bonds showing signs of a negative reversal, we will maintain our locking bias.