Rates rising as oil, gold, silver soar

Inflation is the theme driving rates higher this morning as mortgage bonds (FNMA 30yr 4% coupon) are down 22 basis points and the 10yr Note is down 31 basis points to yield 3.59. Average 30yr fixed mortgage rates (on loans to $417k) had been holding just below 5%, but if this selloff holds, it would push rates higher.

Inflation concerns aren’t just from Europe and China rate hikes this week. Rising commodities are the main issue: oil is at a 30-month high $111, gold is near record of $1474, silver’s at a 31-year high of $40.30. Same story in agriculture. Oil is of particular concern going into this weekend’s election in Nigeria, the fourth largest oil supplier to the U.S. Elections were postponed last week due to violence and fraud.

Stocks still can’t quite break the upside resistance levels of 1333 on the S&P 500, levels it hasn’t closed above since the February 18 high of 1343. And the last time the S&P was that high before February was June 19, 2008. If stocks can rise above it’s current level, we’d likely see a climb higher, which would result in a bond selloff that would also push rates higher.

If the inflation theme continues and stocks can break higher, there’s some meaningful risk of rates spiking. Mortgage bond prices are sitting at a key downside resistance level, and if stocks break higher and bonds break lower, mortgage bond prices could potentially drop another 100-110 basis points, which would translate into rates rising about .375% to .5%.

On top of these factors, there’s $66 billion more Treasury supply coming into bond markets next week: $32b 3yr notes Tuesday, $21b in 10yr notes Wednesday, and $13b in 30yr bonds Thursday. More bond supply can also pose downside price pressure on bonds, and rates rise when bond prices drop.

Check in this weekend for our full WeeklyBasis report previewing next week.