Very early today the 10 yr note was better with the yield down to 2.47% down 1 bp from yesterday; it didn’t last however, at 8:30 the 10 yr yield increased to 2.50% with US stock indexes working lower early after the strong improvements over the last few days. Mortgage prices at 9:00 -20 bps frm yesterday’s close.

At 9:30 the DJIA opened -72, NASDAQ -11, S&P -6. 10 yr at 2.54% +6 bp and 30 yr MBSs -50 basis points. No real let up in underlying volatility, and it will continue through next week at least.

Over the last couple of days, and after the shock to markets from Bernanke’s comments last week, Fed officials are out to cool off the fears. Three Fed officials yesterday making comments that the Fed was still uncertain about what will happened with the QEs. Bernanke last week said the Fed would begin to taper by the end of the year pending how the economy performs. The Fed’s outlook for the economy is optimistic, that the economy is recovering and the Fed will begin backing away. Since that remark the markets convulsed into panic; interest rates increased, the stock market fell---both on significant moves. Then it was the Fed’s turn to be shocked, Bernanke’s remarks were not expected to crash markets and set of the volatility. Now the Fed is out attempting to calm markets with less hawkish comments from the likes of NY Fed Pres. Dudley yesterday and other Fed officials out making speeches.

There has been some relaxation in the bond market, the 10 yr note yield has declined from 2.65% to 2.50% early this morning but the bearish bias remains intact. Unless the US and global economies reverse and weaken the bond and mortgage markets are not likely to improve much. It is all about how the economy performs in the coming months; Bernanke made it clear in his remarks last week that the Fed’s actions moving forward is dependent on data measuring the economy’s performance. Initially no news chose to focus on that aspect, setting off the hysteric moves last week. Now some balance being worked into the equation, but not much and the market volatility will continue with wide swings. Don’t allow yourself to believe rates will fall much; the trend is for higher interest rates, or at best trade at present levels. Bottom line: the Fed believes the economy is improving, the track record at the Fed on economic forecasting isn’t stellar by any means and markets know it. Taking the interest rate forecasts to its lowest denominator in terms of outlook---it all depends on the economy. Our view, the economy isn’t as strong as the Fed thinks, if we are correct interest rates should stabilize at present levels. That said, it isn’t our view or the Fed’s outlook that is important it is what markets think.

Two data points this morning; at 9:45 the June Chicago purchasing managers index, expected at 55.0 from 58.7 in May, the index declined to 51.6. The decline is counter to the increases seen in other regional indexes as most have been better but Chicago isn’t Richmond, there are many more manufacturing operations in the Chicago region. The reaction sent stock indexes down more but didn’t do lot for the bond and mortgage markets. At 9:55 the final June U. of Michigan consumer index was expected at 83.0 from 82.7 at mid-month, the index increased to 84.1. The final reading for the May index was 84.5 so on a month to month view the index declined. The report sent stock indexes down more, but didn’t improve the bod and mortgage markets.  

- Michael Corboy

Treasuries and mortgages traded better this morning prior to 8:30 economic data. The 10 yr note at 2.49% -5 bp, 30 yr MBS prices +24 bp frm yesterday’s closes. Weekly jobless claims were expected -9K, as reported down 9K to 355K; the 4 week average declined about 2800 frm last week. May personal income expected up 0.2% increased 0.5%, personal spending expected +0.4% was up 0.3%; April spending originally reported -0.2% was revised to -0.3%. The personal consumption expenditures and inflation gauge increased 0.1%, yr/yr +1.1%. Adjusting consumer spending for inflation, which renders the figures used to calculate gross domestic product, purchases rose 0.2% in May after a 0.1% decrease in the previous month, The two reports generally in line with estimates didn’t generate any immediate changes in the stock indexes or the bond and mortgage markets. At 9:00 this morning the 10 yr at 2.50% -5 bp, 30 yr MBS prices +30 bps.

At 9:30 the DJIA opened +87, NASDAQ +20, S&P +10; 10 yr 2.49% -6 bp and 30 yr MBS price +35 bps frm yesterday’s close.

At 10:00, a few minutes ago, NAR reported May pending home sales, expected +1.0% sales were up a huge 6.7%. Pending home sales are contracts signed but not yet closed. Not much reaction to the better report so far.  

After last week’s wild selling the bond market is settling down at slightly lower rates but the overall bias remains bearish for the bond and mortgage markets. Bernanke’s press conference last week shocked financial markets here and around the world. No one expected he would be as definitive as he was; saying the Fed was ready to begin tapering its QEs as early as the end of this year and would likely be completely done with it by mid-2014. Markets were expecting the Fed’s next move would be to begin backing off of its $85B of monthly purchases of treasuries and mortgage securities but the time frame wasn’t expected to be that soon. Bernanke said the outlook for the economy was improving and as long as the future data confirmed that the easing’s would end.

The initial reaction to his comments sent interest rates higher and dropped the stock market in excessive movements. Since then the DJIA has recovered, after falling 800 points the index has increased 200 points since Tuesday and so far this morning up another 130 points. The 10 yr note rate, driver for all long term interest rates, increased from 2.30% prior to Bernanke’s comments to 2.65% and 30 yr MBS rates increased 25 bps in a matter of a few sessions. Some retracements in markets was likely and is being motivated by comments from other Fed officials and central banks from the ECB to the Bank of China in efforts to calm markets. We warned market volatility would increase and will likely be touchy now until the June employment report scheduled for July 5^th. Most volatility will be in the bond and mortgage markets; with rates historically low it isn’t realistic to expect interest rates will decline to the lows seen just a month ago. The question now is, how much of an improvement can be expected?  

A couple of Fed officials out today; at 10:00 NY Fed Pres. Dudley. At 10:30 Fed Governor Powell talks. Dudley saying the market’s interpretation of the Fed’s intentions are not accurate; another voice trying to temper the recent shock of increased rates. He wasn’t talking about the increase in the 10 yr note, but more about short term rates which as far as we are concerned weren’t the issue. The Fed will keep the FF rate at 0.0% to 0.25% until the unemployment rate falls to 6.5% and that appears to be a long way off. He said as long as the Fed continues to buy the 10 yr note should not be any higher than 2.50%. The markets are “quite out of sync” with the Fed’s policy.

Bill Gross of PIMCO fame out this morning saying the 10 yr note should be down to 2.20% (2.49% now). Gross, a man of respect has been wrong recently about the bond and interest rate markets. A month ago Gross saying that PIMCO was divesting of some of its fixed income treasuries, then a couple of weeks ago he turned buyer just before the spike higher; now talking up his confused position that rates should be 30 basis points lower on the 10 yr. We talk a lot about uncertainty that presently dominates the markets; Gross typifies what we mean by uncertainty and volatility that is the present state in the interest rate markets.

The bond and mortgage markets, based on all momentum oscillators became oversold and now undergoing a retracement. Rate markets remain bearish in the wider perspective; in the near term there is excessive intraday volatility that implies that uncertainty is dominant in the markets. The last few days the movements through the day have been huge; MBSs opening better then selling back and finally at the end of the day ending close to unchanged from the previous day. Re-pricing from lenders has become a daily occurrence both up and down. Volatility like this is indicative of uncertainty about where rates should be under the present ever-changing outlooks. 

- Michael Corboy

As noted here, we have talked about volatility that would dominate markets the next couple of weeks. today a good example; yesterday MBSs prices fell 33 bps on the day, this morning the 30 yr 3.5 FNMA coupon at 8:30 +73 bps. All about data points and markets were surprised (again) when at 8:30 the final read for Q1 GDP reflected the economy was not nearly as strong in Q1 as was widely believed. The overwhelming expectation was Q1 would be +2.4% unchanged from the preliminary report last month; as reported the economy grew at just 1.8%. The reaction sent 10 yr note yield down to 2.52% from 2.60% yesterday, and spiked MBSs prices higher.

The weaker growth in Q1 has turned speculation that the Fed would begin tapering in Sept into turmoil. As we noted, it is all data dependent on how and when the Fed would begin to end its market support; Bernanke made that plain when the surprised the markets with his comments that he was ready to begin the end of Fed market support. That part of his remarks was swept under the rug by markets that focused only on his remarks that the Fed would rapidly wind down its support and be completely out by mid-2014. The softer than expected Q1 growth will change some of those outlooks that have driven interest rates higher recently. Most of what we had been hearing from analysts and economists were forecasting a slowdown in Q2 that ends Friday, and that corporate earnings would be down from Q1. If those forecasts hold the take away has to be that the Fed isn’t likely to taper as soon as what had been expected until this morning. It is still a bearish bond and mortgage market however the selling binge will likely lessen somewhat.

The weakness in Q1 was due to less consumer spending that accounts for about 70% of GDP growth. Household purchases were revised to a 2.6% advance compared with the 3.4% gain estimated last month. Households cut back on travel, legal services and personal care expenditures and also curbed spending on health care as the two percentage-point increase in the payroll tax caused incomes to drop by the most in more than four years. Disposable income adjusted for inflation fell at an 8.6% annualized rate, the biggest drop since the third quarter of 2008. The immediate reaction from the bullish camp was that the second half of the years would see consumer spending increase---hope is what markets are living on these days.

Mortgage applications decreased 3.0% from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending June 21, 2013, the lowest level since November 2011. The Refinance Index decreased 5.0% from the previous week to the lowest level since November 2011.  The seasonally adjusted Purchase Index increased 2.0% from one week earlier, and was 16% higher than the same week one year ago. The refinance share of mortgage activity decreased to 67% of total applications, the lowest level since July 2011, from 69% the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 7% of total applications. The government share of purchase applications dropped to 28%, the lowest level in the history of this series. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 4.46%, the highest rate since August 2011,  from 4.17%, with points decreasing to 0.35 from  0.41 (including the origination fee) for 80% loans. The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,500) increased to 4.52%, the highest rate since March 2012,   from 4.23%, with points decreasing to 0.28 from 0.34 (including the origination fee) for 80% loans.  The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA increased to 4.20%, the highest rate since August 2011, from 3.85%, with points increasing to 0.40 from 0.22 (including the origination fee) for 80% loans.  The average contract interest rate for 15-year fixed-rate mortgages increased to 3.55%, the highest rate since November 2011, from 3.30%, with points increasing to 0.43 from 0.39 (including the origination fee) for 80% loans. The average contract interest rate for 5/1 ARMs increased to 3.06%, the highest rate since October 2011, from 2.81%, with points increasing to 0.39 from 0.35 (including the origination fee) for 80% loans.

At 9:30 the DJIA opened +89, NASDAQ +28, S&P +9; 10 yr note at 2.52% -8 bps and 30 yr MBSs price +82 bps.

At 1:00 this afternoon Treasury auction $35B of 5 yr notes; yesterday’s 2 yr auction was not well bid.

In Europe the stock markets rallied that added to it when Q1 US GDP hit on relaxed concerns of an early exit by the Fed. A German consumer confidence gauge for July rose to 6.8 from 6.5 in June, Nuremberg-based research company GfK AG said today. That would be the highest since September 2007. Analysts had expected a reading of 6.5. The German 10 yr bond yield fell seven basis points to 1.74% from 1.85 two days ago. Euro-area bonds rose, led by those of peripheral nations including Italy and Spain as European Central Bank President Mario Draghi said monetary policy will stay accommodating, boosting the appeal of fixed-income assets.

Today’s fall in US interest rates is a welcome move; that said the technicals remain bearish. The 10 yr and MBSs could rally a lot more and still not change the bearish outlook. The 10 yr would have to fall to under 2.35% the 3.5 July FNMA coupon price would have to exceed 102.50---presently 100.64. Today’s weak Q1 GDP report is adding support to the bond and mortgage markets that maybe the Fed will not be moving as quickly as had been thought to unwind its easing. That said, although Q1 was softer, it is to an extent history. The future remains unsure however recent Q2 data has been strong; yesterday May durables were better than expected so too May consumer confidence index and May new home sales. Us this and any rallies to button up deals; interest rates are not likely to fall much from current levels. 

- Michael Corboy

Last Week's Mortgage Rates Recap Last week was nothing less than tragic for mortgage rates - as we forecasted. The Fed has spooked the markets with concern that the end of QE3 is on the horizon, and no matter what they continue to say it isn't herding the bears back into the cage. Normally MBS (Mortgage Backed Securities) would have benefited from the huge sell off seen in the stock market - but this last week was anything but normal. We saw MBS sell off over 300 basis points, which means we saw consumer rates increase an average of .625% in a single week (meaning a consumer who started the week with a quote of 4.125% ended the week with a quote of 4.75%). We hope that anyone that was able to lock in their interest rate was listening to the last few weeks of market activity and was able to lock in better rates. The bad news is that barring unforeseen market shaking news, we may pick a little bit of that rate hike back up in better interest rates over the next few weeks, but any retracement we do see is likely to be small (most consumers will not see average rates below 4.5% for conventional 30 year fixed mortgages). This Week's Mortgage Rates Forecast Mortgage Rates Currently Trending: HIGHER This week has opened carrying the same momentum as last week, opening up with a huge loss in MBS this morning, and seeing rates already on the rise. There isn't much in the way of economic news that is getting reported this week that could spark a turn around, so expect the current bearish market to continue. BOTTOM LINE: We are not expecting to see things improve yet for mortgage rates. Don't get caught up waiting for things to go back to where they were. Work with your Mortgage Loan Originator to stay connected to the live trading market to protect your loan, and expect more volatility through this week.                      RateAlert’s Most Trusted Mortgage Loan Officers MLOs that subscribe to RateAlert’s Executive service have the training and market knowledge, along with the data at their fingertips, to expertly help you navigate the difficult and sometimes treacherous process of obtaining home financing and securing some of the best rates the market has to offer. If you would like to learn more about how to time the market to obtain the best interest rates, don’t hesitate to contact the MLO who sent you this commentary. Please click on the following link for a MBS Market Recap: http://www.mortgagenewsdaily.com/mortgage_rates/blog/313851.aspx - Michael Corboy