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Why the 10-year bond continues its rally

Brent Nyitray, CFA, MBA

Overview: Realist Real Estate Roundup, July 7–11 (Part 3 of 6)

(Continued from Part 2)

The ten-year bond continues its rally

The roundup is a weekly series in which we discuss the week’s trading in government bonds and To-Be-Announced (or TBA) mortgage-backed securities. We’ll see where mortgage rates have been and we’ll go over the weekly economic data and earnings announcements. Then we’ll look forward to what’s coming up the following week. The information in this series will be relevant to mortgage real estate investment trusts (or REITs) like American Capital Agency (AGNC), Annaly (NLY), Hatteras (or HTS), Capstead (CMO), and MFA Financial (MFA), as well as people who invest in fixed income exchange-traded funds (or ETFs) like the iShares 20+ Year Treasury Bond ETF (TLT) or in homebuilders.

Financial fears lead the bond rally

The bond market returned to its recent pattern of ignoring bond-bearish data and rallying on bond-bullish data. There was very little economic data last week that would push bonds around. If anything the strength was probably a flight to safety after a big Portuguese bank missed interest payments on some commercial paper. Standard & Poor’s said that the bank’s problems shouldn’t affect the country’s credit rating. It will probably have a limited impact on the economy over all. However, the macro investor playbook says to buy U.S. Treasuries on signs of financial distress. After starting the week at 2.61%, bonds rallied ten basis points. They finished at 2.51%.

Overall, the economic data lately has been pointing more towards a strengthening economy—not a weakening one. However, housing remains stubbornly depressed. The first-time homebuyer remains over-indebted with student loan debt and faces a tough job market. The lower rates are helping the real estate market somewhat. Mortgage origination activity is picking up.

In the next section of this series, we’ll look at trading in the TBA market, which is the basis for mortgage rates. We’ll discuss where mortgage rates have been for the week.

Continue to Part 4

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