Mortgage Rates Ride Roller Coaster

Mortgage rates took a ride on the roller coaster today.  Even though the Mortgage Backed Securities (MBS) started off in negative territory this morning, it rebounded upward then down, then upward – but with little change from the lenders offering better pricing than yesterday as the caution flag was raised ahead of the weekend and next week’s big events.   The most prevalently-quoted conforming 30yr fixed rate remained at 4.25% for flawless scenarios, though 4.125% is still a contender and 4.375% was the norm.

This week had a lot for everyone - the geopolitical tensions in Ukraine and Israel, the S&P making a new high, a very disappointing June new home sales, the June existing home sales not so good when 33% of the sales were for cash by investors still buying up homes to rent.  Weekly jobless claims were very good, declining 19K to the lowest weekly claims since back ibn 2008.  CPI inflation was expected but notching up a little. Weekly claims are likely to be revised next week because this time of the year unemployment claims are volatile do to the auto industry annual change over, we expect claims will increase next week. 

The bond market is still technically bullish, but as we have noted ad nausea the 10 is very comfortable now in a five basis point range between 2.50% and 2.44%, unable to break out in either direction. The majority of time over the last seven markets days the 10yr has traded in that narrow range. MBS prices are technically weaker than treasuries, the price of the 4.0 coupon under its 20 day average, and under the 20 on the 3.5 coupon.

It is always revealing to look at markets from a wider perspective than having to plow through the daily mud -  a lot of news, a lot of opinions and commentary (us too). After all that has been said or written this week the interest rate markets are almost exactly where they ended last Friday.

Next week is rife with a lot of action, expect to experience an increase in volatility.  The stock market took a big hit today.  Most of the Q2 earnings have been better than expected.  The selling today was driven by the fear that next week the FOMC policy statement will be more slanted toward increasing rates sooner and speaks to the economic improvements this week from Europe and China. Then the preliminary Q2 GDP along with a number of other key data points. Last but certainly not least, next Friday the July employment report. Six weeks ago we warned the stock market was heading for a serious correction, we were wrong of course, the key indexes kept on increasing. Wrong in the timing, but we still hold that the equity market is becoming increasingly more vulnerable. Like we say - go with the price action, if it doesn’t meet your outlook you can’t force it. Why do we keep focusing on the stock market? Because equity price changes these days do directly affect the rate markets; not one for one, but money does rotate from one market to the other depending on momentary news and market movements.

In summary, with next week’s big events, I would float until the first sign of weakness. Rate markets will move next week, but which direction is the unknown. Geopolitical events have held rates down and could continue to do so. So far this year good economic reports haven’t moved rates higher as would normally be the case. It’s been a grind sideways to slightly better and hopefully the trend continues.