In terms of outright movement toward higher rates, you'd have to go back to the days following the election in November 2016 to find anything worse than today.  It was like a handful of other snowball selling sprees seen over the years in that it seemed unnecessarily relentless while it was in process, but will end up making sense in the bigger picture.  

Whether or not it will make sense to you depends a lot on how closely you've been following along (either with the realities facing rates over the past few years or simply with this commentary).  It would seem quite complicated if you're not already drinking my kool-aid, so I'll attempt to share an abbreviated recipe below.  Incidentally, I say "my kool aid," but in reality, I think there's only one kool-aid when it comes to the forces driving higher rates over the past few years, and it's the only thing available to drink at the moment.

  • Traders guessed (correctly) that the Trump administration would like to spend more money relative to incoming revenue.  That would involve Treasury borrowing and Treasury borrowing creates higher rates due to supply and demand in the bond market.
  • Meanwhile, the Fed was already in the process of raising its policy rate and reducing its balance sheet reinvestments.  That means the Fed was/is becoming a smaller and smaller buyer of bonds and the same time the government was/is becoming a bigger and bigger seller.  Not good for rates!
  • All of the above was/is occuring against the backdrop of economic and geopolitical uncertainty.  Would Trump's cavalier approach to trade result in a global trade war that ultimately hurts growth?  Would the tax bill stimulation be too much of a good thing for the upper crust of society, making a contraction all but a certainty when the sugar high wears off?  Would US policies have such damaging effects on the rest of the world that the US economy loses the tailwind normally provided by a healthy emerging market and stable economies among trading partners?  Would the Russia investigation ultimately pose some threat to Trump's tenure?

There were more uncertainties to add to that list, but this is more than enough to make the point.  The point is that there have been big, obvious headwinds in place for rates for quite some time.  Those headwinds made a clear case for something like the 10yr yield to move well over 3%, as I discussed in this old commentary post.  But fortunately, those headwinds were offset by the uncertainties--many of which are laid out in the 3rd bullet point above.  

From there, it has merely been a chess match between investors betting on the uncertainties versus those who increasingly accept certain realities.  This brings us to the 'bottomest' of bottom lines.  Days like today and weeks like the first week of September really drive home the reality of exceptionally strong economic data and upside risks to the inflation outlook.  For crying out loud we had the chair of the Federal Reserve today say that this growth cycle could theoretically continue "effectively indefinitely."  That's sheer madness, and entirely emblematic of a level of economic optimism that we haven't seen in this country since the housing boom.  Simply put, we had reasons for rates to move higher, headwinds that kept that move in check, and now days like today that go a long way toward calming those headwinds.  When those days happen with rates breaking above a technical ceiling, it only adds to the upward momentum that we were already likely to see after this morning's data.

MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
FNMA 4.0
100-11 : -0-21
10 YR
3.1813 : +0.1253
Pricing as of 10/3/18 6:19PMEST

Today's Reprice Alerts and Updates
A recap of Alerts and Updates provided to MBS Live subscribers.
12:44PM  :  ALERT ISSUED: At Least This Will Be The Last Alert Today!
11:28AM  :  ALERT ISSUED: Negative Reprices Becoming More Likely
10:31AM  :  ALERT ISSUED: Negative Reprice Risk Increasing
10:11AM  :  ALERT ISSUED: Bonds at Weakest Levels After ISM Surges
8:46AM  :  Strong ADP Data Putting Pressure on Bonds

MBS Live Chat Highlights
A recap of featured comments from the Live Discussion on the MBS Live Dashboard.
Wendy Smith  :  "I'm so glad I locked after this morning's re-price warning."
Matthew Graham  :  "alert risk critical mass, in other words. More would be superfluous."
Matthew Graham  :  "no, just cognizant of the fact that you all probably got the message and additional alerts serve no real purpose on a day where any lender may be repricing at any time."
aaron meyer  :  "MG is it the last Alert because you are throwing in the towel?"
Matthew Graham  :  "we've been oversold for quite a while, both long and short-term. Short-term stochastics suggested a shift a few days ago, but they're very flighty and not as reliable as longer-term shifts. Unfortunately, we never got the longer-term momentum confirmation, and today will only push that farther into the future."
scott weinstein  :  "are we close to being oversold "technically"?"
Nathan Miller  :  "personally preferred my 10//2016 ytd over my 10/2018 ytd"
Jeff Anderson  :  "Are they almost out of bonds to sell today?"
Matthew Graham  :  "I need to get ahold of his actual words, because if that's not taken terribly out of context by the newswire writer, it's an outrageous comment for a Fed Chief"
Paul Martin  :  "If the Fed is saying that they can now eliminate the business cycle....I cam calling a top."

Economic Calendar
Time Event Period Actual Forecast Prior
Wednesday, Oct 03
7:00 MBA Purchase Index w/e 240.7 240.4
7:00 Mortgage Refinance Index w/e 945.9 946.8
8:15 ADP National Employment (k)* Sep 230.0 185 163
10:00 ISM N-Mfg PMI * Sep 61.6 58.0 58.5
10:00 ISM N-Mfg Bus Act * Sep 65.2 60.3 60.7
Thursday, Oct 04
8:30 Jobless Claims (k) w/e 213 214
10:00 Factory orders mm (%) Aug 2.1 -0.8