Mortgage Rates Ride A Roller Coaster

Mortgage rates certainly rode the roller coaster today as European markets continued to provide an unexpectedly large boost in demand for domestic bond markets. Those markets include Mortgage Backed Securities (MBS). The most prevalently quoted conforming 30yr fixed rate for best-case scenarios is 4.125%.

The stock market looks weak as we have been saying for weeks even as the key indexes were making new highs Tuesday. With the Fed and other central banks fueling equity markets it may take a while before the indexes enter into a sustained decline. There were a number of data points this morning, most were negative for the stock market. April industrial production declined, factory use was lower in April than in March and another weak outlook for the struggling housing sector, the NAHB housing market index, fell to 45 from 47 with estimates that it would increase to 48. The US and EU economies are much weaker than what Wall Street touts, consumers are smarter than those that have to run up the bullish flag every day to make a living, and are avoiding the stock market. Consumers spent nicely in March when the weather abated but stopped spending in April. Most may not be able to quantify why they are fearful on the outlook but intuitively recognize the foundation is cracking.

Sit back and take a breath - markets are in turmoil now, trying to understand what is happening. We have our view, other has opposing views, but neither bears nor bulls are at ease currently. Expect another increase in volatility in stocks and interest rates.  We believe rates are going to decline further but the path will be rocky at best.

Technically the MBS price could fall as much as 60 basis points and the 10 yr note could increase to 2.60% without changing the wider bullish biases. Loans that are near closing should be careful. Tomorrow’s price action will provide more insight about what to expect over the next week. We don’t expect the stock market to simply roll over easily, choppy trading will dominate.

In summary, the benchmark 10yr Treasury note finally broke through resistance, but when you break one range, you always find another. Currently 2.47 on the 10yr is a floor of resistance and today it was bounced off of 3 times and was unable to break it. However, the rally in bonds has led to the best rates we have seen in about a year. Hard to pass up these gains, so I am recommending to lock – but if you want to float, do so with extreme caution.