Rate Probability: Sideways to Slightly Higher

The Bond Rate Monitor

So what does China have to do with mortgage rates in the US? Enough to stall an upward trend in the mortgage backed securities market, which is exactly what happened last week. But will rates continue to rise, or is the worse part over?

Rates were improving last week until China announced that they were going to let their currency float against a myriad of other foreign currencies last week. Before this announcement their currency, the Yuan was fixed to the US dollar. This announcement caused a panic in the bond market which feared the heavy Chinese investment in US bonds might be discontinued in the near future. However after digesting the Chinese surprise announcement bonds rallied on Friday and ended at a support ceiling.

This of course means the big question is - Will bonds rally enough to break through the ceiling or reverse course again and head down, thereby pushing rates higher? Unfortunately, if this weeks full schedule of economic indicators is on target, the economy will continue to do better which generally is bad for rates. However, for rates to move noticeably higher the economy will have to post higher improvements than the market expects, which we view unlikely. Therefore, it seems rates will continue to bounce around between the support ceiling and floor this week and maintain their overall downward trend, which means rates will continue to slightly worsen.