Mortgage Rates Improved After Today's Announcement

Mortgage rates improved this afternoon after this week's main event in the form of the Fed's policy announcement. It lived up to its potential as a major market mover, but much of that movement came in the form of short-term volatility. This ultimately left rates within the recent range that has characterized most of the month of June. The most prevalently quoted conforming 30yr fixed rate for best-case scenarios remains 4.25% - 4.375%. 

A fair amount of initial volatility after the FOMC policy statement.  The simultaneous release of the quarterly projections from the Fed took a few minutes to chew on. Mortgage Backed Securities (MBS) prices initially rallied then sold off, then rallied again as market settled down. Generally speaking the FOMC statement itself didn’t change much from the last meeting unless you are a green eye shaded economists looking for minutia.

Yesterday markets were riled up when the May CPI inflation readings were higher than what was expected, lots of hand-wringing and angst that inflation was moving higher and the Fed would begin increasing the FF rate sooner than expected. The data released this afternoon on the Fed’s quarterly economic outlook shot down those fears. The strange reaction yesterday is gone now, for the moment. The table below shows the Fed’s outlook for inflation on the only measure worth watching, the PCE (personal consumption expenditures) is for inflation in 2014 still well under the Fed’s stated target of 2.0%. As we expected, the Fed in the quarterly data lowered its GDP growth from 2.8% in March to 2.1%, in line with reductions frm the IMF and World Bank recently. As expected the Fed will taper another $10B frm its monthly purchases of MBSs and treasuries to a total of $35B frm $85B before the tapering began; $5B each on MBSs and treasuries. The will continue to re-invest in treasuries and mortgages on payoffs and maturing debt. Yellen said: “We would be very unlikely to sell mortgage-backed securities.”

Technically speaking the bond and MBS markets remain bearish, but the level of bearishness is very slim. If tomorrow the 10 yield declines, most of our work will turn slightly bullish. The rate markets are comfortable in the current range from 2.66% to 2.58% where the 10yr has resided since June 6th. The 10yr declined 5 bps today after increasing 5 bps points yesterday on the May CPI report that was somewhat negated in the Fed’s outlook. With the stock market rallying today it is likely our bearish outlook will be delayed for some time - look for the DJIA and S&P to make new al-time highs in the next week.

In summary, the FOMC Meeting came and went with little fanfare really. We are still in the same range of rates for the last year and we remain near the lower end of that range. I think that means the risk of higher rates over the near term is greater than the likelihood of lower rates so I still recommend a locking bias for the short term. Risk tolerance should be your guide.