THE BASIS POINT

Rates Up .5% More By Dec? Barclays Thinks So.

Barclays co-head of interest rate strategy Michael Pond says the 10yr note will rise to 2.70 or 2.75 by year-end, which he says is fair value if economic data supports no recession—Bloomberg video below. He made two passing remarks about rates not rising this much if bond prices “get another bump from Europe” but was otherwise firm on his position of rates going up.

Mortgage rates aren’t tied to the 10yr note, they’re tied to mortgage bonds—right now most lenders use Fannie Mae 3.5% coupon to price rates—but mortgage bonds track the 10yr note medium and long term. So if Pond is right, rates would rise .375% or more. As of Friday, rates had already risen .375% over the past two weeks, then regained .125% yesterday—so we’re up .25% from record lows. So could they go more from here?

Pond’s views are outside consensus but he has a point when he says the Fed is distorting rates by pushing them lower than is justified by fundamentals. He said rates can remain distorted for awhile but ultimately money will go where it should.

So it’s a question of defining “ultimately”.

I think the forecast is extreme because the Fed will continue buying mortgage bonds, and I’ve discussed in detail how that lowers rates.

I agree that market prices for securities ultimately revert to levels driven by fundamentals, the Fed plus Eurozone debt crisis and U.S. fiscal policy paralysis will outweigh fundamentals near-term.

Because of this, I think rates remain in their current range +/- .25% by year end.