Mortgage bonds experienced another gap down opening, pushing interest rates to the highest levels we have seen since March of 2017. This upward move in interest rates has been heavily influenced by soft demand for mortgage bonds. The Fed has cut back on $8 billion in purchases per month and will soon increase that number to $12 billion. By October, the plan is to allow $20 billion per month to roll off the Fed’s balance sheet, which will create even more upward pressure to mortgage interest rates. Further complicating this is the lack of participation from foreign investors who are nervous to invest in the US market as the dollar is in a downward weakening trend. Although foreign investors could make a higher yield by investing in US treasuries and bonds, a weakening dollar could cost them more when they go to convert their money back into their native currency. So beyond just a terrible technical picture for mortgage bonds, there are now true fundamental reasons for mortgage rates to move higher.
Signaling the tightness in the labor market, first time claims for Unemployment Benefits fell to their lowest one-week level since 1973. The drop in claims point to a labor market where employers are hanging onto their employees amid a market where skilled labor is difficult to find. This is particularly true in the manufacturing and construction industries where employers have had a difficult time staffing to meet the demands for their products and services. This report suggests that the current Unemployment Rate is 4.1% (which is the lowest level since 2000), will soon be cut back even lower. The fear of this is that the tight labor force could push wages higher and ultimately drive consumer inflation up. Since inflation is the arch enemy of mortgage bonds, that would equate to even higher mortgage interest rates in the future.
The strong technical move that is driving interest rates higher remains in play. We will maintain our locking bias.