WeeklyBasis 9/3: September Rate Outlook
Rates dropped .125% last week. This after dropping three straight weeks beginning July 25 then staying flat two weeks. The downtrend began with awful Q2 (and Q1 revised) GDP, then a mediocre-at-best July jobs report, then S&P’s U.S. downgrade.
Below are specifics on this rate downtrend, plus September’s rate outlook.
RECORD LOW FOR 10YR NOTE
The 10yr Note yield, a key benchmark for long rates in the economy, closed below 2% for the first time ever Friday.
A yield is a rate, and rates drop when bond prices rise on buying rallies. The 10yr Note and mortgage bonds have rallied as safe haven investments during questionable economic recovery.
The 10yr hit record levels after Friday’s jobs report showed zero August jobs created. Mortgage bonds also rallied, which is why rates fell again.
Markets interpret weak jobs data to mean low company confidence now and even lower consumer confidence going forward.
Consumer confidence and spending was picking up but got a lot worse after the debt ceiling circus in July.
And while we got a decent August ISM manufacturing report—a national reading—two important regional manufacturing reports (1, 2) have been on a three-month weakening trend.
Also last week home price data showed signs of stabilizing, with Case Shiller June home prices up 1.1% since May, the third month of gains after seven months of decline.
So there’s a hint of home price optimism, but weak new and existing home sales still weigh on housing.
This sentiment is driving double-dip recession fears, pushing investors into mortgage bonds and Treasuries, which lowers rates.
HOW LOW CAN RATES GO?
Economic data—or fundamentals—is one factor that drives trading in mortgages and Treasuries. Trading patterns—or technicals—are another.
Weak fundamentals support current high levels for mortgages and long-dated Treasuries, but technicals have been capping runs higher. For now.
Mortgage bonds (FNMA 30yr 4% coupon) first hit an all-time high November 2, 2010, one day before the Fed’s QE2 announcement, then sold off when the Fed confirmed QE2 was Treasury buying rather than more mortgage bond buying—which was the focus of QE1.
That selloff caused rates to spike: they rose .875% in six weeks.
During the run up to that—on October 8-9, 2010—30yr fixed rates (for single family home loans to $417k) were 4% at zero points.
Those were the true record lows. Despite headlines in recent weeks, rates haven’t closed a 2011 trading day at 4% zero points.
But it’s close: mortgage bonds have broken through those November 2, 2010 highs four times in the past six weeks—including last week—before retreating.
FED’S ‘OPERATION TWIST’
The Fed’s August 9 statement was open ended about future quantitative easing, which is printing money to buy bonds and lower rates. That’s contributed to this current bond rally even though Operation Twist, a different Fed strategy is likely to come before any more QE.
Speculation about Operation Twist, a Fed tactic of selling short-term securities and buying long-term securities, has also contributed to the 10yr Note rally because investors like to get in before the Fed.
They also like to get out before the Fed so investors could just as easily sell if/when Operation Twist begins, pushing yields higher.
The end result is more rate volatility.
The good news about Operation Twist is that it doesn’t require printing money like QE does. It’s about shifting U.S. debt to longer durations, much like a homeowner might switch from a 5yr ARM to a 30yr fixed while rates are this low.
It remains to be seen whether we’d get more QE, and in what form.
More Treasury-focued QE would likely cause rates to spike like they did in late-2010 because it would push money into stocks. And there’s been no indications about mortgage-bond-focused QE.
SEPTEMBER RATE OUTLOOK
Given all these fundamental and technical factors, we’ll likely be in a trading range until the September 21-22 Fed meeting, with rates +/- .25% from current levels until markets can get a clear signal from the Fed and forthcoming economic data.
PREVIEW FOR SEPTEMBER 6-9
Next week’s economic calendar is slow with August ISM non-manufacturing Tuesday and weekly jobless claims Wednesday as the highlights.
We’ll also get more uncertainty out of Washington as Congress and the White House politicize jobs up to and after Obama’s jobs speech Thursday.
Stay tuned daily on Twitter and Facebook.