Good Tuesday AM,

Bonds came to play for the second day in a row.  The 10-yr at 1.65 and mortgage bonds +20 on top of the +24 yesterday. That’s a nice mini rebound and a good thing (finally). New home sales were hammered. This is an affordability issue, just as yesterday’s miss in existing home sales was. The market has seen 108 consecutive months of price increases and this is simply not normal or sustainable. When home prices rise quickly, alongside rising interest rates, housing affordability takes a hit, which takes marginally qualified buyers out of the market or forces them into less expensive homes. A balanced market sees prices rise when there is a strong demand in conjunction with a normal supply. Or a normal demand accompanied with a strong demand. When we get strong demand and weak supply, you get artificial increases which are not sustainable. This is why the market is overreacting to inflation. Demand is strong! It was pent up for a year. Supply is weak, manufacturing suffered for 12 months. So, again we get too much (short lived) demand, combined with not enough (short lived) supply. When these two things normalize in the coming months, we will see how strong the economy truly is. I suspect it is weaker than markets believe but you cannot fight the tape. OK, so here’s the deal on rates. The following a points of resistance on the 10-yr: 1.62, 1.59, 4.50.  If we break through one and keep going, rates will improve. If we, for instance, do not break 1.62 (we are at 1.65 today), all we are doing is moving up and down  in the same trading channel and we are coming to the top of the one we are in.  If we stall here, lock.

Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell are set to face lawmakers in Congress for two days of hearings starting at 12:00 p.m. Eastern Time. Yellen is likely to push the case for more spending, repeating her argument that the U.S. has a lot of room for borrowing with interest rates so low. In his prepared testimony Powell said that while the economic recovery is progressing well, it is still far from normalized. These are prepared and released testimony so I do not expect any market movement as a result of the testimony.

Please remain safe and healthy, make today great.