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Friday’s bond market initially opened in positive territory but has since slipped
into negative ground once the stock markets opened for trading. The stock
markets first opened in positive ground, however the major indexes are
currently mixed. The Dow is up 27 points after falling almost 354 points
yesterday while the Nasdaq is down 18 points. The bond market is currently
down 10/32, which means we will probably see an increase of approximately
.125 of a discount point in this morning’s mortgage pricing.
There is nothing being posted this morning that is of any concern to the mortgage
market. At first glance, it appears that stocks are influencing bonds since
the positive open in the major indexes led to bonds erasing their early
minor gains. While that is not particularly good news for this morning’s
mortgage pricing, it does at least give us something to predict bond and
rate movements. If the traditional pattern of good news for stocks is bad
news for bonds and vice versa has indeed returned to the markets, it would
be one step closer to sanity and understanding what is going on in the
day’s trading.
Wednesday’s tanking in the bond market and sizable spike in mortgage rates
still has many of us dumbfounded. There are many theories rampant as to
why, but none are conclusive. It was surprising to see the FOMC
post-meeting statement’s indication the Fed’s current bond buying program
would be maintained was contracted during Chairman Bernanke’s press
conference approximately 2 hours later when he hinted that they would taper
the program later this year and end it mid-2014. That is, assuming the
economy continues to show signs of growth. Those bond purchases (QE3) are
important to the mortgage industry because it is longer-term securities
such as mortgage-related bonds that the Fed is buying at a rate of $85
billion a month. When the Fed eases back or stops altogether, liquidity in
the bond market will be affected. Less liquidity means fewer buying
dollars, which leads to higher bond yields and rising mortgage rates.
My biggest issue is the basis of this so-called economic growth. It was
just six months ago (4th Qtr 2012) that we were flirting with contraction
in the Gross Domestic Product (GDP). And just a couple weeks ago we saw the
highly regarded ISM manufacturing index fall to 49.0, the first sub 50
reading that indicates contraction in the sector since November of last
year. The housing sector has shown signs of growth, but there is some
concern that much of that growth is based on investor purchases, some even
from large investment funds. Not from true first time and repeat home buyers
that will occupy the houses. That sure sounds familiar, doesn’t it? We have
been down that road before. Furthermore, the unemployment rate of 7.6% is
still well above ideal levels. If adding new payrolls at a pace of around
150,000 a month, the unemployment rate is not going to fall below the 6.5%
the Fed has stated on multiple occasions is needed for them to ease their
stimulus programs. At the very least, certainly not in the next several
months.
The point is that much of this speculated economic growth is just that-
speculation. I find it very difficult to believe that the economy is as
stable and will continue to grow at the pace that we are being led to
believe. The problem is that market traders like to be ahead of the move
and that appears to be what has happened. The good news is that when (yes,
I did say when) the euphoria wears off in the coming months and it is
apparent that they jumped the gun this week, we have plenty of room for
improvement in bonds and mortgage rates. The next month or two will be
extremely important in determining whether or not that economic stability
was speculation or an accurate prediction. I strongly believe that
speculation will take first place.
Next week brings us the release of a handful of economic reports that may
influence mortgage rates in addition to two Treasury auctions that have the
potential to do so also. None of the data is considered to be a major
report or likely to significantly move the markets, but they do carry
enough importance to cause minor or moderate changes in bond prices and
mortgage rates. There is nothing of relevance scheduled for Monday, so
hopefully the new week will start off calmly. Look for details on next
week’s schedule in Sunday’s weekly preview.
If I were considering financing/refinancing a home, I would.... Lock if my
closing was taking place within 7 days... Lock if my closing was taking
place between 8 and 20 days... Float if my closing was taking place between
21 and 60 days... Float if my closing was taking place over 60 days from
now...
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