uploads/// year bond yield LT

Bonds rally hard on international weakness and a dovish Fed



The ten-year bond yield is the basis for long-term interest rates

The ten-year bond influences everything from mortgage rates to corporate debt. It’s now the benchmark for long-term U.S. interest rates. Note that old-timers might remember when the 30-year bond was the benchmark, but that changed during the ’90s. When investors ask, “What’s going on in the bond market?” they inevitably are asking where the ten-year is trading.

Note that short-term rates are still important, particularly LIBOR, which is the base rate for almost all short-term rates.

10 year bond yield - LT

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This information is relevant to mortgage real estate investment trusts (or REITs), such as American Capital Agency (AGNC), Annaly Capital Management, (NLY), Hatteras Financial (HTS), Capstead Mortgage Corporation (CMO), and MFA Financial (MFA). It’s also relevant to people who invest in homebuilders or fixed income exchange-traded funds (or ETFs) such as the iShares 20+ Year Treasury Bond (TLT).

Important data last week

The most important event for bond investors was the FOMC minutes last week. The minutes were more dovish than expected. You can read all about the minutes and the implications for real estate investors here.

Bonds continue to rally

The ten-year bond yield began the week at 2.43% and rallied to finish at 2.28%. While the FOMC minutes were dovish, a global rally in bond markets based on economic weakness in Europe was the impetus to the rally. U.S. Treasuries don’t trade in a vacuum. If global bonds are rallying, Treasuries will probably benefit as well as investors sell expensive European debt and buy cheaper U.S. Treasuries.


Overall, recent economic data point to a strengthening economy. But housing remains stubbornly depressed. The first-time homebuyer remains over-indebted with student loan debt and faces a tough job market. But the lower rates are helping the real estate market somewhat. Mortgage origination activity is picking up. Over the medium term, bond yields will probably rise and fixed-income securities will sell off.

In the next part of this series, we’ll look at mortgage rates. In the following parts, we’ll address trading in the TBA market. The TBA market establishes the base for mortgage rates. We’ll also discuss how mortgage rates did for the week.


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