Market Updates

Stocks are higher this morning and mortgage bonds are roughly unchanged. Under the hood, the bond market still looks weak. Bonds rallied after last week’s cooler PCE report and the soft jobs number, then gave those gains right back.

One possible driver is Japan. They’re the largest holder of U.S. debt and have been dealing with a weaker currency. A weaker yen makes everything they import more expensive, so they may be selling Treasuries and buying their own bonds and currency to prop it up. Treasury data lags about 45 days, so we’ll get a clearer read when the August numbers hit around mid-October and September’s in mid-November.

Bond volatility is also pushing mortgage spreads wider. The MOVE index, which tracks bond-market volatility, touched 113 this morning. The mortgage spread sits around 2.30% and may keep widening.

Week ahead: Tuesday brings ADP Weekly and Fed speakers. Wednesday is mortgage apps, the 10-year auction, and Fed minutes. Thursday is jobless claims and the 30-year auction.

The big level: 10-year yields are testing 5.29%, the June 2007 high. That level got pierced last week, but yields managed to stay beneath it. If 5.29% breaks, the next stops are 5.43% (2002 high) and 5.52% (2001). After that the chart gets ugly — the next ceiling isn’t until 6.80%. You’ve probably heard talk about a small chance of much higher mortgage rates; that path runs through a 6.80% 10-year plus a wide spread. That’s not anyone’s base case, and there’s a long way to go.

For now, 5.29% is the line in the sand. Mortgage bonds are holding the 100.22 floor but haven’t gotten back above the 100.70 ceiling.