Mortgage Rates Jumped Again

Mortgage rates jumped again today, moving to the highest levels more than a month ahead of tomorrow's hotly anticipated Fed Announcement.  MBS were going to be under pressure no matter what today.  The CPI data clearly pressured MBS lower but we found fantastic support at our new intra-day support level located at one of our falling windows.  We got a very nice bounce off of that floor but could not make it back into positive territory.

Back to the Feds – unfortunately, I have not seen anyone make a differentiation between Fed policy in general and the rate hike specifically.  The next big problem with the prevailing assessment of what happens AFTER the Fed hike is that markets do not work like that.  Everyone knows the rate hike is coming.  It is not as if financial markets have been sitting on their hands, waiting for the Fed to confirm that they're actually going to hike when more than 90% of market participants believe it's going to happen.  Far from it, in fact.  Market participants always make trades that correspond with their best guess about the future.  If traders think rates are going higher, they trade rates higher well before the Fed hike confirms it.  This has obviously been a huge part of the pressure on rates in 2015, and failing to mention this current and ongoing effect of the Fed rate hike would be irresponsible.  In other words, the Fed hike has already pushed mortgage rates higher, even though it hasn't happened yet (the hike).

Now what will happen to the mortgage rates?  The short answer is that the two can move in completely opposite directions, and they have!  Even in the most recent Fed rate lift-off in 2004, longer term rates like mortgages and 10yr US Treasuries were flat to slightly lower as the Fed began a series of hikes.  Of course those longer term rates had previously spiked in anticipation of the Fed's policy tightening.

The bottom line is that no one can accurately claim to know what the effect on mortgage rates would be for any given Fed scenario.  To do so would be to claim that one's own opinion/knowledge superseded the collective power of the entire financial market.  You can be sure the market has already priced mortgage rates to reflect all of its anticipations about the near term future.  Now, as always, the next move higher or lower will be driven by the things that the market did NOT see coming or that the market has NOT yet been able to account for.

In summary, count on volatility tomorrow.  Or rather, count on the POTENTIAL for volatility being through the roof.  Even though I have succumbed to the fact that the Fed is going to raise the rate, we do not really have any idea how financial markets are going to react.  Plus, there are other components of the Fed's announcement that can have a dramatic effect on the longer term outlook.  Do not assume that you will be able to lock today's rates tomorrow - for better or worse.