Interest rates are hitting a four month high this morning, breaking many technical support levels. The 10 yr and MBSs were hit hard yesterday and so far this morning another spike in rates. For four months the 10 yr traded quietly in essentially a 15 basis point yield range with a few forays out of the range that lasted just a day or so. We noted for weeks that although the range was holding the momentum oscillators were weakening; the relative strength index was slightly negative since the first of February. Nothing was changing however; the situation in Europe with Greece’s debt kept a bid in US treasuries, the Fed’s constant comments that the US economy wasn’t on solid footing, and that the Fed would keep the FF rate at zero to +0.25% thru 2014 kept long rates in check. Much of the rationale for low rates is still there but has lessened. Putting it in perspective, as we have constantly commented, interest rates are at 50 yr lows and were unlikely to decline much regardless of the momentary circumstances.
Yesterday the dam broke, traders have been nervous about being long bonds but held on until the 10 blew through its first key support at 2.05%, the level that had previously stopped selling. Yesterday the trigger that started the run was two-fold; Feb retail sales were stronger than thought then in the afternoon the FOC policy statement was the preverbal straw. There was a growing thought that the Fed would launch another easing move to increase buying of treasuries and MBSs; the FOMC said no, not yet. The economic outlook according to the Fed had improved somewhat from the previous FOMC meeting. The stock market has continued to increase taking another support from the bond market. Meanwhile in Europe there are still huge debt issues but at the same time (at least at the moment) that its economy while in recession may not be as serious as markets had believed.
While the increase in rates in the past 24 hours has been swift, we continue to believe rates will not increase too much. How high is questionable but I don’t see them higher than 2.25% (10yr) on the 10 yr note on this move. Will rates fall back to under 2.00% on the 10 yr? Not likely as long as Europe doesn’t completely implode, and that isn’t expected. The Fed is committed to keeping rates low; it’s the definition that is in question. The bond market is capitulating, the exodus has been rapid however once positions are re-balanced the bond and mortgage markets will begin another trading range but at higher levels.
Commentary provided by David Shirmeyer