• If the Fed is on a tightening path, there is a limit to rally in the 10-year T-note, and we’re at it.

The U.S. 10-year Treasury last Friday closed at 2.38 percent, and today trades at 2.37 percent. So nothing happened this week.


It is worth time-tracking this week’s events versus markets, an excellent illustration of what markets care about and do not.

One of my wife’s Bronx nursing school pals for a time worked in an ER in Miami. One day an elderly lady came in: “My belly hurts.” Does it hurt all the time? “No, it comes and goes.” How often does it change? “What, I get a pain and I should look at a clock?”

If you work in bonds, or suffer their consequences to mortgage rates, look at the clock.

This week’s entertainment began on Wednesday. In early morning news, Panera Bread entered a $7 billion merger, and the Dow opened up 106 points from the night before. Then North Korea launched an IRBM just as Xi Jinping arrived here, followed by news that Syria had used sarin on civilians.

The 10-year T-note in trading just this week. You can see the odd drop on Wednesday afternoon upon release of minutes. One reason to buy: an over-aggressive Fed. Another: the hope that the Fed won’t hike while dumping its balance sheet (it said it might hold off), but who wants to buy while the Fed is dumping? Then this morning the brief Syria dip, now reversed.

At midday Trump said in a press conference that Syria had crossed several “red lines,” that Bill O’Reilly is a good man and innocent of accusations, and that former National Security Advisor Susan Rice committed a crime. Through all of that the Dow rose another 142 points, up 248 total on the day.

At 2 sharp Wednesday afternoon came the release of minutes of the Fed’s March 15 meeting, most devoted to the Fed’s firm intention (very firm) to begin at this year-end to unload the Treasurys and mortgages, which it bought as “quantitative easing.”

The 10-year, one year back. A lot of people still think that 10s will fall off this very nice “double-top with shoulders.” If so, rates could fall a quarter to a half-percent. Not likely, not after failing to break 2.30% this week, and the Fed on the march.

It will not sell them, just gradually stop buying new ones as the old ones mature. The Fed will retain at least the $1 trillion or so in Treasurys necessary for normal operations. Its MBS (mortgage backed securities) holdings are a larger percent of that market, about 30 percent of all Fannie/Freddie/Ginnie MBS outstanding, and a little less than 20 percent of all residential mortgages, securitized or not.

The Dow rolled over immediately, closing 30 minutes later down 41 points. It did not help that the Fed minutes mentioned that stock prices and other risk assets had “risen significantly in recent months.”

This chart is the 2-year T-note, the best proxy for the Fed, and it has not broken down at all. It is likely now to rise in anticipation of the Fed’s next hike at its June meeting.

Thursday was quiet on all fronts, waiting for today’s employment data for April. A day which bond traders cheerfully call “death watch,” in honor of those who will have guessed wrong about the payroll data to come at dawn Friday (this week, including me).

At the end of the day yesterday one of our owners asked for an opinion about floating a big loan unlocked overnight to today, or locking and accepting a loss. I was scared of the job data and the Fed, and advocated locking at a loss.

Last night sitting quietly, watching Fed arguments on Bloomberg… “BREAKING NEWS: U.S. Missile Strike on Syria…” The 10-year broke down to 2.29 percent, pulling mortgages also (some trading is 24/7). Great. No matter what the jobs report, military action prevails, and our owner has locked a deal on my advice which would be better if he had waited until morning.

The Atlanta Fed GDP tracker has sunk again, now estimating only 0.5% growth in the first quarter. Consensus may be wrong, but it holds that Q1 GDP was suppressed by inventory, trade, and seasonal adjustment effects signifying nothing, the economy — if anything — perking up.

At dawn today, weather-distorted job data arrived weaker than expected, with rates bound to fall farther. (Me: Prepare extensive apology, and vow never again to give advice.)

But in one of the miracles protecting small children and drunks, our locking conversation had gone on too long the night before, past 5 p.m., lock desk closed — no lock in the system — hence, this morning the ability to lock the modest improvement.

Fleeting: The 10-year was 2.30 percent early, has risen ever since, and is now unchanged from last week.

Several lessons apply. Got a pain? Look at a clock. The Fed matters more than anything. The economy might slow, the Fed might over-do its tightening or blow up markets by disinvesting its balance sheet, but if it’s on a tightening path, there is a limit to rally in the 10-year T-note, and we’re at it.

The Fed’s overnight rate is pegged .75-1.00 percent, and the Fed could not be more direct that it intends two more hikes this year.

Its most cautious forecast of normalization is to 2.50 percent within two years. Absent an economic slowdown, it is inconceivable that the 10-year can stay as low as it is. Clock or no clock.

Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.

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