MARKET COMMENT Mortgage bond prices started the week in positive territory. Unfortunately those gains were short-lived as trading was thin and choppy with continued large market swings. Most of the data was neutral. We received some positive news that inflation remained in check as the PCE core came in up 0.1% exactly as expected. As the economy improves inflation will become a focal point for investors. Mortgage bonds ended the week slightly positive by about a 1/8 of a discount point.
Look for the possibility of volatility amid likely thin trading conditions and a shortened trading week. The bond market will close early Friday afternoon ahead of the New Year’s holiday.
- 2-year Treasury Note Auction; Dec. 27; Important. $35 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
- Consumer Confidence; Dec. 28; Consensus Estimate 56; Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
- 5-year Treasury Note Auction; Dec. 28; Important. $35 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
- 7-year Treasury Note Auction; Dec. 29; Important. $29 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
- Weekly Jobless Claims; Dec. 30; Consensus Estimate 423k; Important. An indication of employment. Higher claims may result in lower rates.
FOREIGN DEMAND China is the largest foreign holder of US debt and continues to debate future purchases. Recent talk from China indicates a desire to diversify. Many stories hit the wires last week indicating that diversification may take the form of European debt purchases. A Chinese spokesperson told reporters that the EU will “be one of the major markets for our (future) forex investment.” These remarks caused some weakness in the US debt market Thursday. The concerns were eventually calmed but uncertainties remain regarding the future of the entire US debt market.
Global investors are constantly searching for opportunities that will provide the greatest return with the least amount of acceptable risk. That is one of the major problems with China investing in EU debt. While the higher rates of return are enticing, they are not without considerably higher risk.
Investment products inherently all possess some sort of risk. As global financial markets struggled, many market participants searched for a safe haven in the US financial markets even with their shortcomings. With the backing of the US Government, investors viewed the US Treasury and mortgage bond markets as less risky investment opportunities amid global economic uncertainty. This resulted in an increased demand for US investments, such as the mortgage-backed securities that affect mortgage interest rates. Increased demand for mortgage bonds moved prices higher and interest rates lower. A reversal of this foreign demand has and may continue to result in future spikes in mortgage interest rates.
Caution is the key heading into the auctions this week. There is a real possibility of wild market swings with thin trading conditions likely. Mortgage interest rates remain historically favorable. The future remains uncertain. Today’s rates are a given. Lower rates are not a given as is evident from the overall upward trend seen the past few months.