Daily Quote: From all that I have seen, time and time again, at least 90% of success derives from having a dream and knowing what you want.
The Tale of Two Trumps:
The markets continue to struggle with which Donald Trump really sits in the Oval Office. Is it the Donald Trump who erratically tweets at 3:00 am about everything from Hollywood to Nordstrom’s to The Apprentice’s ratings or is the more staid, presidential Donald Trump we saw Tuesday night who discusses bipartisan support for pro-growth policies and initiatives? Time will tell but if yesterday’s stock market rally was any indication the markets certainly seem to have heard enough from Tuesday’s speech to believe the real Donald is the one we saw Tuesday night. Despite the rapid sell off in the bond market we kind of wound up right where we started. If you’d fell asleep last Wednesday and awoke again this morning Treasury and MBS pricing, while a little lower, wouldn’t look meaningfully different today than 1 week ago or 1 month ago.
On the Federal Reserve front, the market is pricing in a 65% chance of a rate hike at this coming March meeting. Janet Yellen and Co. have been hesitant to hike rates and have pulled more than one head fake on us over the last year but this is another indicator the market is watching anxiously. There are some folks who believe a Fed rate hike could help the long end of the curve – which is where most of 30-year MBS partial durations sit. So what they do at this meeting, and equally important what they say in their statement, will be a significant data point for us all.
So What Does This Mean For Mortgage Participants?
Donald is not even half way through is first 100 days so we should begin seeing a flurry of activity surrounding initiatives like infrastructure projects and tax cuts. We’re also waiting to see how easily Ben Carson gets confirmed and then who Ben chooses to oversee some vital functions within the GSE complex. So expect rates to trade within a wide range and be completely unpredictable for the next 2 – 3 months. The more you see and hear from staid, presidential Donald the more traction pro-growth initiatives will get in Congress. This in turn will likely lead to higher rates. The more we see and hear (and read) from erratic Donald the more we’ll see rates hit the lower bound of our range. If you’re correctly wondering what that range on the 10-year Treasury is it appears to be a low of around 2.35% and a high of about 2.75%. Anything meaningfully higher than that makes US Treasury debt screamingly cheap to foreign investors. So I suspect there is a temporary cap on how high rates can go.
So unless you are close to Jared and Ivanka and they’re telling you which Donald you’re dealing with each day please don’t try to game the system. There is a much higher risk of rates getting worse for Mortgage Participants than better. So in the immortal words of Jeff Coon:
“Dow 21000 and the rally continues.
Fed hike on tap, and back to the top of the recent range for 10's.
Lock em if ya got em....”