If you were lucky enough to get the 5th off, welcome back from the long weekend. A lot can happen in such a short amount of time. Last Friday, with skeleton crews running the trading desks, we saw the release of the June employment data and an upward revision of new jobs for April and May. The stronger than expected employment report sent interest rates screaming higher with MBS prices down as much as 200 bps at one point in the day (another new record sell off for my eyes). It isn’t news that interest rates were headed higher, most investors have been bailing out of fixed income investments since early May. We have consistently noted that all of our data was pointing to increasing rates. What we are surprised about though is the magnitude of the increases. The expectation of rates going up has been a self fulfilling prophecy; anticipation has caused investors to bail out of bonds and the decrease in demand has pushed interest rates higher faster. Mortgage rates are closing in on 5.0%. This week Treasury will auction $66B of notes and bonds. Recent auctions have not been met with strong demand; if this week’s auctions do not show an increase in demand interest rates will see more price declines and rate increases. Hopefully the higher yields will bring in more bond purchasing and we won’t see this happen. Remember, the Fed has been buying Treasury bonds at about $10B a week, so when they stop buying the excess will have to be picked up by the open market.
I think last Friday was another over reaction to the jobs data and we could see some rate improvements this week, but beware of any new market news that could cause more over reaction and rates to move higher again. Long term outlook is for rates to continue their trend upwards.
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