MARKET COMMENT Mortgage bond prices fell last week pushing mortgage interest rates higher. Stocks continued to show strength throughout the week. The DOW rose over 100 points, which didn’t help mortgage bonds. There was some talk of Japan selling US debt to raise cash. That chatter along with more hawkish remarks from the Fed regarding rates pressured bonds. The employment report released Friday was better than expected adding to the losses seen earlier in the week.
Mortgage bonds ended the week worse by about 3/8 of a discount point.
Global events, stocks, and oil prices will likely guide trading this week as there are very few data releases.
- Weekly Jobless Claims; April 7; Consensus Estimate 385k; Important. An indication of employment. Higher claims may result in lower rates.
- Consumer Credit; April 7; Consensus Estimate $4.9b; Low importance. A significantly large increase may lead to lower mortgage interest rates.
CREDIT DEMAND Inflation is typically the most important focus for the mortgage interest rate market. Inflation remains a concern as the Federal Government continues to print and spend money in an effort to spur the economy. Unfortunately, mortgage interest rates also continue to be pushed around by gyrating stocks and weak demand as performance uncertainty looms. Most of the recent increases in interest rates have come following stronger stocks. As stocks struggle we often see rates improve. In addition, mortgage bonds have benefited from global economic uncertainty as investors search for safe havens amid sovereign debt defaults in Greece. This flight to quality buying of mortgage bonds has pushed prices higher and mortgage interest rates lower.
The level of interest rates reflects the balance between the supply of money from investors and the demand for money by borrowers. Rising inflationary expectations and uncertainty about the performance of the debt cause investors to require higher rates of return on investments to compensate for the erosion of the principal that eventually is returned to them or the risk of non-performance. Regardless of inflation levels, though, rising economic activity can increase the demand for investors’ funds, and thereby lead to higher interest rates. Investors pulling money out of bonds and into stocks could pressure mortgage rates.
The demand for money diminishes as the economy struggles. The Fed lowers interest rates as an incentive to businesses and consumers to increase their borrowings. The Fed hopes manufacturers will increase their investments in plants, equipment and inventories and that consumers will push housing construction along with consumer spending and with that, consumer debt.
Analysts will monitor this week’s consumer credit levels. There is much debate in the financial community about the future. Economists, market analysts, and traders all seem to have a different opinion about the future state of the economy and especially whether or not we have hit the bottom of the economic slide. One thing most market participants agree on is both the bond and stock markets are going to see additional volatility. Now is a great time to take advantage of rates at the still historically favorable levels.