The 10 year Treasury yield in the U.S. did not breach 3.0% last week, but it came awfully close. At 2.9% today, it is still at 2 year highs. The impact of the rapid rise in rates has been felt throughout global markets, most severely in emerging markets. Within the U.S., the housing-related sector has been the most hard hit, as Dan highlighted in his CotD post last week.
The housing-related weakness is starting to spread to the large cap banks as well. Wells Fargo’s CFO Tim Sloan spoke at an investor conference this morning. He did anticipate reduced mortgage production revenue in the third quarter, but expressed confidence that home price appreciation in this recovery was sustainable.
The real concern for investors in housing related stocks, though, is not whether home prices go lower, but whether mortgage originations and refinancings fall substantially given the recent rate spike. WFC, with its large exposure to residential real estate (through both mortgage and home-equity loans), has been a particularly poor performer in the banking sector in the past month. The stock was down again today (as I write unched), briefly breaking its 100 day moving average (purple line below) for the first time in 2013:
The stock is essentially trading near 2 month lows. Market participants are clearly getting more worried about the potential drop in the mortgage business in the second half of 2013. The stock’s relative weakness is worth watching as rates remain near their high of the year, especially as the recent break of the uptrend that has been in place since last fall could put the $40 near term support (white line) level in play, while the break-out level to new multi-year highs back in May at about $38 (also the 200 day moving average) should serve as healthy long term support and possibly a good long entry point.