MARKET COMMENT Mortgage bond prices got crushed last week pushing rates considerably higher. Trading started negatively Monday when stronger than expected retail sales figures piled on top of the weakness seen the prior week. There was considerable profit taking as traders sold bonds. Tame inflation readings helped buffer some of the price increases and the Fed’s bond purchasing also helped but they were not enough to stem the negative trend of overall rising rates. For the week interest rates finished worse by about 1 1/2 discount points.
The bond market will be closed Thursday for Thanksgiving. The market will also close at 2 pm ET Friday. This shortened trading week and the likely thin trading conditions could result in continued wild market swings.
- Q3 GDP second estimate; Nov. 23; Consensus Estimate 2.4%; Important. The aggregate measure of US economic production. Weakness may lead to lower rates.
- Existing Home Sales; Nov. 23; Consensus Estimate 4.4m; Low importance. An indication of mortgage credit demand. Weakness decrease may lead to lower rates.
- Personal Income and Outlays; Nov. 24; Consensus Estimate Up 0.5%, Up 0.5%; Important. A measure of consumers’ ability to spend. Weakness may lead to lower mortgage rates.
- PCE Core Inflation; Nov. 24; Consensus Estimate Up 0.1%; Important. A measure of price increases for all domestic personal consumption. Weaker figure may help rates improve.
- Durable Goods Orders; Nov. 24; Consensus Estimate Down 0.3%; Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates.
- U of Michigan Consumer Sentiment; Nov. 24; Consensus Estimate 69.4; Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
- New Home Sales; Nov. 24; Consensus Estimate 312k; Important. An indication of economic strength and credit demand. Weakness may lead to lower rates.
MORE AUCTIONS The US Treasury will auction $35 billion of 2Y notes, $35 billion of 5Y notes, and $29 billion of 7Y notes this week. US Treasury bonds do not directly dictate fixed mortgage interest rate pricing however they do have an indirect impact. Both Treasuries and mortgage bonds often track in the same direction but this is not always the case. There are many times that Treasuries and mortgage bonds move inversely.
The markets usually focus on the foreign demand component of the auction results. Despite the overwhelming size of the US economy, foreign investors can still have an effect on moving the financial markets. When foreign economies struggle foreign investors often purchase US based investments including mortgage bonds. This increase in demand usually causes mortgage bond prices to rise and interest rates to fall. This flight to quality buying was one of the factors that helped mortgage interest rates remain historically low in years past.
The Treasury auctions this week will be important in determining the current appetite of foreign investors for dollar denominated securities. If this week’s auctions are poorly bid mortgage bond prices could fall pressuring mortgage interest rates higher.