It's taken less than two weeks in September to erase all of the summer's big gains in long-term Treasury prices. Today's five basis point jump in the 10-year yield to 2.60% brings it above the level it was at just after the Memorial Day weekend.
If Europe led yields south during the summer, it's leading them north now, with the German 10-year Bund yield up another five basis points to 1.05% after sinking to below 0.9% two weeks ago. Italian, Spanish, and British yields are sharply higher as well (though all three countries sport 10-year rates lower than the U.S.).
The first Fed rate hike will occur in June of next year, not September as earlier forecast, says the team at Bank of America. Over the 18 months following, BofA sees rate hikes at every other Fed meeting and a peak Fed Funds rate of 4%.
Why the changed forecast? Growth and inflation data have been stronger than the bank expected, and booming asset markets alongside falling long-term bond yields have triggered a "re-engagement of the banking system."
Also seen is a gradual change in rhetoric from Janet Yellen, and the bank expects an imminent change to the Fed's long-used phrase of rates at zero for a "considerable time."
"It's almost comical" that experts continue to forecast rising rates, says Jeff Gundlach. The downgrade of GDP forecasts has now become an annual event, yet "hope springs eternal" that 3% growth is just around the corner.
Look no further than housing, says Gundlach, for what's holding the economy back. There's a secular trend at play as demographics continue to force a shift away from home ownership, and the cyclical action of rising home prices will just accelerate this.
Earlier, the MBA reported mortgage application volume fell 7.2% last week, bringing the MBA index to its lowest level since December 2000. Refinance volume fell 11% to its lowest level since Nov. 2008, and purchase volume fell 3% on the week, and 12% from a year ago.
The purchase print is especially troubling, says Diana Olick, as all-cash institutional buyers are moving out of the market, leaving mortgage-dependent buyers to pick up the slack.
The 10-year Treasury yield is higher by two basis points to 2.53%.
The FOMC's July policy statement noted "significant underutilization of labor resources," reminds Jon Hilsenrath. With today's nonfarm payroll report showing unemployment the same in August (6.1%) as it was at the time of the July meeting, the Fed won't need to make big changes when it puts out this month's statement.
Under debate at the Fed is whether to change its assessment of labor market slack, and it's a back-and-forth likely to go for another few months. When the committee no longer sees "significant underutilization," it will be a signal interest rates are close to rising. Also of note: The broader U-6 unemployment rate fell to 12%, but it was 8.8% when the recession started.
A check of short-term rate futures finds them modestly higher and pricing in a 25 basis point rate hike by July of 2015.