Mortgage Rates Continue to Go Lower

Mortgage rates continued lower today, helped along this time by European markets.  Although mortgage rates are most directly influenced by prices of Mortgage Backed Securities (MBS), MBS themselves are influenced by broader bond market movements.  The most direct influence comes from US Treasuries, but Treasuries in turn are affected by European bond markets.  4.125% is now back in the spotlight but 4.25% is still the most prevalently quoted conforming 30yr fixed rate for top tier scenarios. 

The US stock market began its long awaited pullback earlier this week but with only minor declines.  This morning a Portugal bank was in the headlights with reports that the bank may have failed to make debt payments. With the equity markets in Europe and the US already way overdue for a ‘normal’ correction the Portuguese bank news dropped the US DJIA 180 points within 30 minutes of the open; the 10yr note rate declined 5 bps to 2.50% and MBS prices were a little better but it was mostly in safe Treasury debt. 

We don’t believe the Portuguese bank issue is the beginning of more financial problems, it is more a continuation that has been troubling the EU since 2008. What we can take away is that problems in the region have not been corrected. The US stock market is beginning to enter into a correction that may take the DJIA down 1000 points before some support. The Fed can say all it wants about the improving economy and increasing jobs, but the consumer is still not willing to spend other than for a car, and wages are stagnant and low-paying. 

Weekly claims were out this morning behind the Portugal thing.  Treasury sold $13B of 30yr bonds this afternoon at 3.369%, the demand from foreign central banks was the strongest since Feb 2006.   

The ride to lower rates is only going to occur if investors and traders press stock indexes lower. That won’t be easy though, with no other opportunity to find alternative investments the decline in stocks we expect will be very volatile, leading to volatility in the bond and MBS markets. Trading bonds or MBSs now will take a lot more backbone (and money) to take the ride down. Volatility is costly and requires patience; the first leg of a turn in any major market direction is usually accompanied with increased interday and intraday movements. 

In summary, if you floated overnight, you were rewarded handsomely this morning. News out of Europe helped spark a flight to safety where investors sold stocks in favor of bonds. As the day has progressed, MBS did give back some of the gains – but for now, floating may yield some positive results unless you are closing in the next two weeks.