More comments on why rates are rising
No one will argue that volatility has increased recently in the fixed income (and therefore MBS) markets, and that only a few folks out there (traders) are enjoying it. Loan agents (and their clients) who locked prior to yesterday are pleased, but concerned about closing their loan prior to lock expiration. Anyone hedging a pipeline has a lot of coverage on now. Anyone who didn’t lock is wondering if their entire pipeline is going to go away. MBS sales were nearly twice the recent volume averages, according to TradeWeb, 95% of them being 30-yr coupons. MBS prices closed worse by about 1.375 when the herd was done thundering through, and 4% securities (containing 4.25-4.625% mortgages) closed below 100 for the first time since June.
Why did rates shoot higher Tuesday? Traders say it was mostly due to the tax stimulus, and its potentially vast impact on GDP. Paul Jacob from Banc of Manhattan wrote, “We have a partial laundry list of drivers: An extended run of generally better-than-expected economic data, last week’s disappointing employment numbers notwithstanding, an absence (for now) of the Euro-scare bid for Treasuries, this week’s auctions, into a December market with shaky liquidity, today’s generous agreement on taxes etc., signaling an appetite for near-term fiscal accommodation from our newly-divided government, and from a technical-view-point the bond charts now look pretty ‘crummy’.”
Despite a languishing housing market and the weak employment data on Friday, for now the markets seem to want to focus on the underlying improving fundamentals as a whole (ISM, claims data, GDP, global inflation). Interest from buyers (like money managers or insurance companies) has been spotty during the week of heavy supply (treasury and Corporate) which has not helped. The auction yesterday went “ok”, but is now underwater given the sell-off. We have another $21 billion to sell today (10-yr) and $13 billion in tomorrow’s 30-yr, so we are not done with it.
That being said, Mr. Jacob points out that yesterday’s close “puts the real 10-year rate (vs. 12-month trailing core CPI) at 2.55%; that’s higher than 80% of the past decade. A 3.50% 10-year would put the real rate close to a 10-year high. The economy’s looking better, but it’s not strong enough to withstand high rates.” The higher yields in the US, combined with euro-nervousness, have certainly helped the dollar. “Although there are concerns that the continued tax cut will bring a further deterioration in the U.S. budget deficit, investors are seeing the rise in yields as a positive for the dollar just now.” The 10-yr yield hit 3.25%, but is now down to 3.20%, and mortgage prices might be a shade better on investor rates sheets, depending on how they reacted to yesterday’s market.