Bond Market Repeating History. False Start Fuels Rally

Here we are again. History seems to be repeating itself as we head into the summer months.

The market got all excited about a speedy economic recovery following a seasonal uptick in consumer spending and positive progress in the labor market only to find that those improvements weren't sustainable in the real world where Main Street wasn't able to accumulate wealth or deleverage at a fast enough pace because only high-skilled labor is being awarded wage hikes and home buyer demand is in the toilet right along with home prices.

The same thing happened last year. Street economists upgraded quarterly growth projections only to be disappointed by unsustainable momentum down the road, which brought on downgrades and a return to "long road ahead" reality. We've described this behavior as a "false start". It can be brought on by homebuyer credits, payroll tax cuts and quantitative easing efforts or any other inorganic effort that distorts perspectives of economic reality. And it can be easily erased by unexpected events like earthquakes and floods.

History started repeating itself in December: SEE IT HERE. Signs of underlying economic weakness were then observed early and often, which we recapped HERE. Our 2.85% target was reiterated HERE,  which looked quite possible in this POST.  Then primary dealers and economists threw cold water on our outlook HERE.

Below is the 10yr chart we've shared over and over again illustrating why our long-term rally target was 2.85% (the 23% retracement of all time 10yr yield lows)...which would be followed by the 10yr note re-entering the RED internal trend before rates rose again. 

We're not all the way there yet...but there is little resistance standing in the way of 2.85% right now. Revisiting the RED internal trend is still very much up in the air as is another Quantitative Easing program.

Check out the highest FNCL 4.0 prices since December 7, 2010.

Focusing a bit more on the expected impact on loan pricing, there has been minimal activity in the secondary market so far that would imply lock desks are shifting their hedging strategies to the MBS coupons that would allow for a faster decline in mortgage rates (4.0 30yr MBS allow for 4.25% C30 pricing). Once we see secondary moving "down in coupon" with their hedges, assuming there are loans to lock,  we will be quick to alert rate-watchers of the pending transfer of the "Production Coupon Title Belt" to 30yr 4.0s. This event could gain momentum on Friday morning after the Employment Situation Report, but that no where near a sure thing.  Loan pricing is extremely aggressive. C30 Best Execution has fallen to 4.50%. This is what we're telling consumers...

CURRENT GUIDANCE:   We're now sitting at new 2011 lows. And while "The Wall" is still standing, there is now clear justification for borrowers looking to float their loan on an intermediate to long-term timeline. Further positive progress will however be slow and short-term back-ups are to be expected. From that point of view, borrowers working on a shorter lock/float timeline should remain defensive of new, lower "Best Execution" Mortgage Rate quotes. Your main goal is to protect a lower rate offer from short-term market fluctuations.  Stay tuned for further developments. This is getting exciting!

WHERE IS THE LOAN SUPPLY???? READ MORE