Tuesday’s bond market has opened up slightly even though stocks are showing early strength. The major stock indexes are showing noticeable gains with the Dow up 81 points and the Nasdaq up 24 points. The bond market is currently up 3/32, which should improve this morning’s mortgage rates by approximately .125 of a discount point.
We have a seen a sizable increase in bond yields over the past two weeks, with the benchmark 10-year Treasury Note moving from 1.63% at the beginning of this month to 1.91% this morning. Since mortgage rates tend to follow bond yields, this means we have seen a spike in interest rates also. Hopefully the lock advice has been heeded during the past couple weeks. At 1.91%, I think there is still a little room for yields and mortgage rates to move higher, but the risk is diminishing in my opinion. I still look at 2.00% as an important threshold for the 10-year, so as long as we gradually move higher and not quickly jump above that level, I may take a less conservative stance towards locking or floating a rate in the near future.
There was nothing of importance posted this morning. April’s Producer Price Index (PPI) will be released at 8:30 AM ET tomorrow. The PPI helps us measure inflationary pressures at the producer level of the economy. If this report reveals weaker than expected readings, indicating inflation is not a concern at the producer level, we should see the bond market improve tomorrow. The overall index is expected to fall 0.5%, while the core data that excludes more volatile food and energy prices has been forecasted to rise 0.1%. A decline in the core data would be ideal for mortgage shoppers because inflation is the number one nemesis for long-term securities such as mortgage-related bonds. As inflation rises, longer-term securities become less appealing to investors since inflation erodes the value of those securities’ future fixed interest payment. That is why the bond market tends to thrive in weaker economic conditions with low levels of inflation.
The second report of the day will be April’s Industrial Production at 9:15 AM ET tomorrow. It measures manufacturing sector strength by tracking output at U.S. factories, mines and utilities. It is expected to show a 0.2% decline in production, indicating that manufacturing activity is growing. A larger than expected decrease in output would be good news for the bond market and mortgage rates because it would indicate that the manufacturing sector is not as strong as thought. This report is considered to be moderately important, so it will likely need to show unexpected strength or weakness to cause movement in mortgage rates. The PPI report will probably be the biggest influence on bond trading and mortgage rates tomorrow.