This week US interest rates open at their highest level since early Nov. Last week rates increased on better equity markets in the US and Europe and estimates of strong retail spending over the Thanksgiving weekend. Now that the holiday is over markets will re-focus on the fiscal cliff. There is an increasing sentiment that politicians will come up with something that will avoid the cliff; however it isn’t likely that whatever Congress and the Administration agree on will solve the serious fiscal problems. The most likely outcome before the end of the year is an extension of the Bush tax cuts into next year with a deadline to actually agree on a longer term fix.
This week markets get the second look at Q3 GDP, Oct new home sales, Oct durable goods orders, and Oct personal income and spending. Technically the bond and mortgage markets are weaker now than a week ago; that said, while we don’t expect interest rates to decline much neither will the increase much. Those still looking for interest rates to make new lows are likely going to be disappointed. We continue to believe the low yields set last July won’t be exceeded. The Fed will continue to buy MBSs and additional treasuries through early next year but that will only assure rates won’t increase much.