Rates ended last week even. Not a bad outcome considering the mortgage bonds rates are tied to continued to inch lower—and rates normally rise when bond prices drop like this. But lenders have been holding the line on hiking rates until the selloff steepens.
Let’s review rate activity for the past three months to see if that gives us any signals about what’s next. We’ll look at two key rate market benchmarks: the 10yr Treasury Note yield and the Fannie Mae 30yr 3% coupon price. The former is a guide for the latter, which is a guide lenders use to price consumer mortgage rates.
Rates were in a record low range of 3.25% to 3.375% (on loans up to $417k) much of 4Q2012, then started rising January 3. That’s the Fed released minutes from their December 12 rate policy meeting. When the initial announcement of that meeting was first released, it left markets thinking the Fed would keep overnight rates near zero and continue their agressive mortgage bond (aka MBS) buying to keep mortgage rates ultra low until unemployment drops from current 7.9% to 6.5%. After that, rates were in true record low territory for the rest of December. But when markets got the detailed minutes from that meeting on January 3, it was a different story: “several” members advocated to slow or stop MBS buying (aka QE3) by the end of 2013.
Rates started rising, and despite a brief reprieve for two days in mid-January, they were up .375% (to 3.625% for loans to $417k) by the end of January. The good news for now is that rates have remained at that level since.
But as shown in the chart below, the selloff continues in the Fannie 3% coupon that lenders use to price consumer mortgage rates. Friday’s close of 102-29 was down 4 ticks or 13 basis points from a week earlier, and is now at levels last seen in September 2012. The next support is a drop to the 102 range, a level not seen since August 2012. Same story for the 10-year Treasury Note, which is yielding 2.01% as of Friday’s close, and the chart below shows the steady rise in yields (aka rates) to this current level. If this breaks above 2.05%, we could see this rate rise continue to the next support level of around 2.10%.
The 10yr Note is a broad rate market benchmark, and while mortgage bonds that lenders use to set consumer rates (like the Fannie 3% coupon discussed here) don’t always correlate day to day, they tend to follow the same trends over longer periods.
These higher rate trends speak for themselves in the two charts below (used with permission from MortgageNewsDaily). The Fannie Mae chart is price, and rates rise when prices drop in a selloff. The 10yr Note chart is yield (aka rate) which is rising as prices are dropping while investors are selling 10yr Notes:
Meanwhile stocks have risen every week so far in 2013 as you can see in the chart below. The S&P 500 is up 6.52% this year to close at 1519.79 on Friday. Considering it’s only February, this isn’t far from the 1539 consensus year-end mark estimated by 14 major Wall Street firms in a Bloomberg survey. And as we head into the final week of 4Q2012 earnings, Bespoke Investment Group calculated that 63.4% of U.S. companies have reported better than expected results, which is on pace to be the best beat rate since 4Q2010 when 66.2% of companies beat forecasts.
Bonds could benefit on any possible stock pullback, which means more sideways movement in rates. But a rate drop still looks elusive at this point.
The reason I mentioned the Fed minutes topic above is because we’ll get minutes from the January 30 Fed meeting this Wednesday and markets could be reminded yet again of certain Fed members’ desire to slow or end bond buying to keep rates low.
If this happens, it could be another signal to rate markets to continue selling and settle in on a new trading range with lower prices and higher rates.
One possible offset to higher rates are the macro issues that initially drove rates lower in the past couple years. Those issues have taken a back seat to trading technicals (discussed above), but they may start worrying markets again this week, which might help rates.
We can expect more debate about the sequester, which is $1t of automatic spending cuts (see table below from Economist briefing) that begin March 1 if Congress does not act. Plus the eurozone economies will begin to get more attention again as voters go to the polls February 24 to decide who can save or tank Italy’s economy.
JUMBO AND FHA RATES AREN’T RISING…YET
On a closing note, it’s important to mention that higher rates have mostly on Conforming loans to $417,000.
There’s a second tier of conforming loans from $417,001 to $625,500, but many lenders have been using jumbo products to fund the loans from $417,001 to $2m. And jumbo rates have been more steady because securities markets for these loans are more favorable (full post on this coming shortly).
So people in higher priced markets aren’t seeing this rate spike as much as those in true conforming markets.
The same story is going on with FHA loans. Rates are holding at staggering lows of 3.25% for loans up to $729,750 because securities markets for these loans are also favorable. For now, these rates plus FHA mortgage insurance fees still pencil favorably for many clients. But there are fee hikes coming April 1 could make FHA loans too expensive for those with less than 20% down. Read more about higher FHA fees for longer as of April 1.
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