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Daily Agenda: Mortgage Markets Look Toward Rate Hike

Trans-Pacific Partnership up for vote in Congress today; IMF negotiators walk on Greek delegates as talks stall.

For the first time since last autumn, U.S. 30-year fixed mortgage rates climbed above 4 percent yesterday, according to data published by Freddie Mac. This rate increase is the latest signal that markets, such as real estate, are anticipating a Federal Reserve rate hike in the coming months. The move has already impacted refinancing volume. Industry group Mortgage Bankers Association reported that such applications dropped by nearly 5 percent this week versus the same period in 2014. For financial markets accustomed to a direct link between home values and discretionary spending, any signal of a slowdown in turnover in property markets would be perceived as a potential drag on growth. This would also be bad news for the 15.4 percent of U.S. homeowners that remain underwater on mortgages, according to a report released this morning by online real estate database company Zillow.

White House faces battle over trade bill. The fast-tracked Trans-Pacific Partnership bill is up for a vote in the House of Representative today. The legislation, which faces strong opposition from both sides of the partisan aisle, would bring the nation closer to ultimate acceptance of the proposed 11-nation trade pact.

IMF walks away from table with Greece. Negotiators for the International Monetary Fund departed Brussels late Thursday without securing an agreement with the government of Prime Minister Alexis Tsipras. The setback follows a day filled with positive commentary from Athens, which helped drive the Athens Stock Exchange General Index up by more than 8 percent in intraday trading.

Costolo out at Twitter. Embattled Twitter CEO Richard Costolo has stepped down yesterday. Shareholders have been placing increasing pressure on Costolo, as the social media firm missed revenue and profitability targets after the pace of new users slowed to single digits in recent quarters.

Former senior party leader in China receives life sentence for corruption. Zhou Yongkang, the former director of China’s domestic intelligence agency, was sentenced to life imprisonment after being found guilty of corruption. The trial and resulting verdict are seen by many analysts as another signal that Communist Party of China General Secretary Xi Jinping is consolidating power within the upper echelons of Beijing’s ruling elite.

Emerging-markets outflow continues. Market data provider EPFR Global reported net outflows of more than $9 billion from emerging-markets equities, the fastest pace in more than a decade. Analysts say that expectations for a further upswing from the U.S. dollar if and or when the Federal Reserve lifts rates.

Portfolio Perspective: Treasury Markets Brace for a Busy WeekKarl Haeling, Landesbank Baden-Württemberg

Technically, Thursday’s market action was moderately impressive. Prices made new lows for the recent rally before surging higher and closing well above Wednesday’s highs. Ten-year note yields held support at 2.51 percent, a 61.8 percent retracing of the sell-off between September 2013 and February 2015. Volume was better than average but not particularly heavy, and the size of any further upward correction could be limited because Treasuries were only slightly oversold before the rally began. We see the first significant level of resistance near 2.3 percent, the area that had provided good support in mid-May.

From the supply perspective, new issue activity in the coming week will slow noticeably. There will be no Treasury note or bond auctions, and European sovereign supply will be greatly reduced from what it was this week. U.S. corporate/financial supply should be relatively strong, with preliminary indications of $25 billion–30 billion coming to market.

In terms of supply, one element to highlight: on June 23–25 Treasury will auction two-, five- and seven-year notes for settlement on June 30, a situation that raises questions about the amount of demand ahead of the end of the quarter. There are already signs that market liquidity will be severely limited before the end of the month. Buyers could be reluctant to expand their balance sheets at this time.

Corporate issuers could also be somewhat hesitant to come to market in the middle of the coming week because of the Tuesday/Wednesday Federal Open Market Committee policy meeting. This meeting will be accompanied by the quarterly dot-plot release of FOMC interest rate expectations and Fed chair Janet Yellen’s postmeeting press conference. Few market participants expect any policy change but there is much speculation and uncertainty about the message the Fed will communicate on its view of the economy and the outlook for rates.

Karl Haeling is a vice president of capital markets at Landesbank Baden-Württemberg’s New York office.

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