Here’s Why Rates Up A Bit Since Monday

Fixed-income traders report that trading in this environment is growing increasingly difficult. “We’re approaching levels that suggest the worst is built in.” The MBA reported that mortgage applications fell 4.3% last week in spite of the great rates. Banks are afraid to lend, to put it simply. Volatility picked up a little Monday afternoon when traders realized the Fed’s daily purchases were not going to be enough to hold up mortgages at current (low) yields, higher levels of volatility and supply. Throw in some European uncertainty and the REIT issues mentioned above and folks become nervous.

Bernanke’s economic outlook yesterday showed concern about the problems in Europe and market uncertainty, and he urged policy action to support the housing market and encouraged Congress to come up with a long-run plan for fiscal responsibility – nothing too dramatic. But he feels that stabilization in the housing market is crucial to the economic recovery, and that Congress should focus on policies to support housing such as managing REO overhand, facilitating refinancing for underwater borrowers, stabilizing distressed neighborhoods, and suggesting a clear path for the future of the mortgage finance system. Good luck with that one ahead of next November.

By the end of yesterday Treasury rates were nearly unchanged from Monday’s closing levels, with the 10-yr at 1.78%. Originator selling picked up with supply totaling between $2 and $3 billion, higher than average over the last 30 days per Tradeweb, which pushed MBS prices down about .375.

Overnight Italy’s credit rating was cut by Moody’s for the first time in almost two decades on concern that chronically weak growth will make it difficult to reduce the region’s second-largest debt while fallout from the region’s debt crisis boosts financing costs. Do you think so? Moody’s lowered Italy’s rating three levels to A2 from Aa2, with a negative outlook.

The ADP numbers came out this morning. Small business service providing companies contributed nearly 2/3 of the jobs – and the basic ADP number showed a pickup of 91k, a little stronger than expected. Later we have an ISM Non-Manufacturing number.

This morning the 10-yr is up to 1.84% and MBS prices are worse by about .250.

Consumer mortgage rates are up about .125% to .25% since Monday as mortgage bonds trade wildly. The big picture still supports low rates, but the volatility won’t stop as markets sort through the issues.

Here’s how to shop for a mortgage in this environment.