WeeklyBasis 6/18: Two Reasons Rates Could Rise

Rates ended last week even after heavy volatility. Tuesday, rates rose as mortgage bonds sold sharply on less bad U.S. retail sales and a 5.5% spike in Chinese inflation since May 2010. But as the week progressed, bonds rebounded and rates improved on tame U.S. core inflation and contracting U.S. manufacturing activity.

Rates also benefitted as investors concerned about Greek debt contagion sought the relative safety of U.S. mortgage bonds. Investors will continue to watch Greece closely in the next few days. Rates will likely remain even next week, but there are two things that could push rates up:

(1) If markets perceive forthcoming Greece plans as good for stability, rates could rise a bit as bonds sell and stocks rally.

(2) The Fed will end a two-day rate policy meeting with a press conference Wednesday, and while their message of near-zero overnight rates won’t change, Bernanke may issue a more firm reminder that the Fed is done buying bonds when QE2 ends June 30. If so, rates could rise a bit as mortgage bond investors take some profit.

May’s existing and new home sales are Tuesday and Thursday, and there’s not much evidence to suggest material improvements that would push rates up.

Also the third of three 1Q2011 GDP readings is due Friday which shouldn’t be too much different from the revised-down second reading of 1.8% vs. 3.1% from 4Q2010. This will be neutral to better for rates.