As discussed in the previous post, outflows from fixed income funds have been quite severe. However in spite of the various forecasts, the so-called "Great Rotation" out of bonds and into equities has not materialized.

Last year we discussed just how frothy the US fixed income valuations have become. Now in a matter of several weeks, the US bond markets have wiped out a year's worth of gains and then some. That includes all the interest income.

The chart below shows a clear divergence in trends of the total loans and leases on US banks' balance sheets and the broad money supply measure (M2). Loan balance growth is slowing, while the money supply keeps growing at a steady rate of around 7%.

Mortgage backed securities (MBS) have sold off sharply over the past month as fixed income markets face the new reality of rising rates. But unlike most other fixed income securities, MBS duration tends to increase with yield.

Freddie Mac yesterday released the results of its Primary Mortgage Market Survey (PMMS), showing fixed mortgage rates climbing higher amid a solid employment report for May. Since beginning their climb last month, the 30-year fixed-rate mortgage has increased over half a percentage point. Regardless, mortgage rates are coming off their all-time record lows, which is helping to keep homebuyer affordability high.

As mortgage rates in the US reach the highs not seen since early 2012, many are asking the key question: would this rise in rates impact the housing market or consumer sentiment?

Since the financial crisis, the correlation between treasuries and many credit assets such as high yield bonds (HY) has been strongly negative. With rates at extraordinarily low levels, HY price movements were driven mostly by spreads.

Freddie Mac yesterday released the results of its Primary Mortgage Market Survey (PMMS), showing fixed mortgage rates climbing higher for the fifth consecutive week on concerns the Federal Reserve may slow its bond purchases amid a strengthening economy.

Some economists continue to misinterpret the recent movements in M2, one of the measures of the US broad money supply. People use this indicator to argue all sorts of things - from a slowdown in lending to the reason for low inflation and even as a harbinger of a major correction in equities.

Freddie Mac yesterday released the results of its Primary Mortgage Market Survey (PMMS), showing fixed mortgage rates following long-term government bond yields higher. The average 30-year fixed moved up nearly half a percentage point since the beginning of May when it averaged 3.35 percent.