FRIDAY UPDATE
The bond market went crazy again today with little justification (not
that it really needs any nowadays). We saw significant moves up and down,
but it eventually closed down almost a full point. The yield on the
benchmark 10-year Treasury Note closed at 2.51%, which was last seen in
August of last year when bonds rallied from almost 3.00% to just above
2.00% in a very short period of time. This caused multiple upward
revisions to mortgage rates again this afternoon.
Looking at charts and crystal balls doesn’t help the situation at all.
Today’s activity doesn’t change my long-term outlook that we will
eventually see a sizable drop in mortgage rates when economic growth
speculation is confirmed as only speculation and not a prediction. What
today’s selling does do though is raises the range from where we will see
rates peak and then fall. In other words, we can expect to see a higher
high and a higher low.
When the 10-year Treasury Note closed at 2.35% following the Fed debacle
Wednesday afternoon and then 2.42% yesterday, we were at a level of
resistance that should have helped limit further losses and increases to
mortgage rates. This morning’s trading pointed towards that support, but
then the floodgates opened and the day turned ugly yet again. With the
10-year now at 2.51% and well above the 2.42% resistance level, I see
little to prevent it from shooting back up near 3.00% that we were at
last summer. Unfortunately, this does not bode well for mortgage rates as
bond selling pushes yields higher and mortgage rates follow yields. This
is especially true since it did not take a stock rally to fuel the bond
selling. The Dow closed up 41 points while the Nasdaq lost 7 points
today. The lack of a stock to bond trading pattern removes the
possibility of stock weakness fueling bond buying. Accordingly, we are
left to set aside the crystal ball and research charts that have done so
well for us historically and simply raise the white flag by shifting to a
lock recommendation across the board until logic returns to the markets.
I am very confident that we will see mortgage rates move much lower,
although it probably will not be from today’s levels.
To reiterate some points made this morning……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... Lock if my closing was taking place
between 21 and 60 days... Lock if my closing was taking place over 60
days from now...
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