Let's get the housekeeping out of the way first.  With so much talk in the news about the coronavirus effect on GDP, I figured I'd point out that today's -5.0% result is for Q1.  Financial markets are much more interested in Q2's data, and even then, GDP isn't necessarily the first place investors look for an indication of the economy.  It's more of an 'evening news' type of indicator whereas ISM PMIs and NFP are for traders.

Speaking of traders, whether we're talking about equities or debt, the average investor is currently taking part in the "if all goes according to plan" coronavirus bounce.  This involves a gradual correction for bonds and a faster-paced correction in stocks after the ridiculous period of volatility seen in March and early April.  Logically, that was the time frame with the fastest changes and more troubling covid-19 developments.  Like prairie dogs after a gunshot, traders are popping their heads back up out of their defensive holes in the ground, checking to see if the coast is clear.

On any given day, perhaps market participants are better characterized by some animal that moves in herds, or perhaps even those who follow each other blindly.  If your friends jumped off a cliff (or strapped on a jetpack and blasted off), would you follow?  For stocks and bonds, the answer has frequently been clear.

Day-to-day volatility aside, the gradual trend in the first chart is the baseline (hence the "if all goes according to plan" part).  It's interesting and important to consider how mortgage rates have performed during that time.  Despite that gradual uptrend in Treasury yields, mortgage rates were at or near all-time lows for almost every lender at some point in the past 2 weeks.  For a few lenders, it was yesterday, even if only by a hair.  How is that possible?

Mortgage rates have been able to fall during the time that Treasury yields were rising because mortgage rates didn't fall nearly as much when Treasury yields first responded to the covid-19 panic.  A combination of servicing cash flow concerns, origination cost uncertainty, and capacity constraints meant that mortgage rates jumped higher than they've ever been relative to where bond markets say they should be.  That relationship (mortgage rates vs MBS) is charted below.  In just the past week, the spread has returned to levels that at least existed in the past, even if only right before the Fed's QE3 in September 2012.  Getting back into a historical range means there's less of a cushion in margins at lenders, and thus less of a mystical ability for mortgage rates to continue to defy the rest of the bond market.

Bottom line: if bond yields continue to rise gradually, we'll soon see mortgage rates doing the same.