Mortgage Rates Moved in Shocking Direction

Mortgage rates and many other areas of financial markets moved in shockingly counterintuitive ways after today's big jobs report.  The employment headlines were very nice, but it was not the headlines that caught the markets attention as much as the decline in the unemployment rate or a little stronger job growth. The secret double probation news was the fact that 800K people in April dropped out of looking for a job as the labor participation rate continues to fall, at 62.8% from 63.2 in March and the lowest participation rate since Sept 2008.  The unemployment rate fell to 6.3% because of the decline in people looking for jobs.  A continuing side bar - the jobs being created are for the most part service jobs that are low paying jobs.

To give you an idea on what happened today with rates, when you have this much positive news, never has a move in rates gone this far positive on these results.  However, a continuing side bar - the jobs being created are for the most part service jobs that are low paying jobs.  The most prevalently quoted conforming 30yr fixed rate for best-case scenarios is now 4.375% pushing into the range of 4.125 – forget about 4.25% as I think we might pass it up fast.

It's not fair or accurate to say that rates are lower ONLY because of these headlines.  In fact, markets often use these sorts of events as cover and justification for trading decisions that might otherwise seem to not make enough sense.  But it's highly unlikely that rates would have been able to move lower today in the face of such a jobs report without help from another variable.  At this point, it's a guessing game as to how much of the strength owes itself to that predisposition and how much owes itself to geopolitical risk.  One of the only safe conclusions that can be made is that while we are now breaking out of the 2014 rate range, we would certainly remain in that range if we factored out the geopolitical risk.

As the rate market looks good, caution has to be made as the 10yr is still holding close to the low yield for the year – BUT IT IS NOT A NEW LOW!  To drive rates lower the 10 has to move a little lower which will trigger more buying. The 10 yr is still the highest rate investors can get compared to rates in Europe for 10 yr sovereign debt. Go with the flow now; watch the stock market, any selling will add support to lower rates. Volatility in stocks and bonds remains high, wide swings are possible. 

In summary, in the world of completely unexpected turn of events, today is about as big of a surprise as you can imagine. I would float cautiously into Monday, because if we can sustain this break lower...this could be just the beginning. That said, be ready to lock on Monday because a move higher will likely do so with quite a bit of momentum.