I hate to start off the week on a bad note be unfortunately we are seeing some carry over from the selling last week. It is much of the same story but a strong retail sales number this morning did not help either. The market is still fixated on the story that the Fed is planning is ease their bond purchase program (QE). There was a Wall Street Journal report over the weekend regarding the subject but the reaction to the article was that it did not reveal anything new. So based upon what has yet to be communicated by the Fed, you can make the conclusion that the bond sell-off is a severe overreaction to a non-story. However, if the Fed has formally discussed a easing in QE behind the scenes then maybe there is something to this.
The good news is that we should see some clarification on this mystery because there will be a lot of Fed speeches taking place this week. I for one do think this sell-off is a over-reaction and mind you I am very careful when I say these things. For one I do not like being wrong and allowing everyone who reads this knowing I was wrong. Second, I do not like originators making lock decisions on my market opinion. However, I think most of you are smart enough to take my opinions with a grain of salt. But I just am not buying into this sell-off. Even if the Fed has discussed a plan to curtail QE, it would not happen for several months and it is not like the markets expect this to last forever. Also the markets are basing this on 1 strong NFP report which we have seen can be very different from month to month. Remember the story prior to this month’s NFP was that the Fed might increase their QE purchases. My how things have changed so quickly.
One point that is fact and that is that the Fed does not blink at any one report like traders do. They need more proof and 1 strong NFP report will not do it. Yes, it is a good start but to assume that the Fed will reverse course now is just plain stupid in my opinion. However the markets seem to think otherwise and this has resulted in a big jump in the 10yr to 1.92%. And when we get this close to 2.00% you start to think it may be around the corner. Like I said we get a lot of Fed-speak this week so we expect to know more of what the Fed is thinking. I certainly hope I am right and we get back into the 1.80-1.85% range. Regardless of what happens over the next few days this is yet another painful reminder of how quickly the US Treasury and mortgage markets will change once the Fed starts to exit. Like I have said on multiple occasions, it will not be pretty. It will be quick and painful. Sort of like that scene in “The 40yr Old Virgin” where the Steve Carell character is getting his chest waxed. Also I do not like what I have seen in mortgages since this story came out mid-last week. They have been getting beat up and that is expected when the thought of a buyer of the magnitude of the Fed may no longer be present. Like I said when this does become official and I do not think now is the time, get ready for a 4.5-5.0% par 30yr mortgage rate and a 3%-handle on the 10yr.