Mortgage Rates End Higher – A Solid Bad Week

Mortgage rates continued higher today, solidifying this week as the worst one in quite a while.  Not since the first week in November have rates risen so quickly.  That said, the volatility might be a bit easier to stomach this time around - especially for those who have not been able to lock a rate yet.  Reason being - the total move amounts to a rate change of about an eighth of a percent (.125%). 

Interest rates increased this week after spending three weeks trading in a narrow range. The 10yr note and MBS markets finally broke loose, unfortunately not the way we all wanted. I kept saying numerous times over the course of the last two weeks that once the tight range was violated the initial move would be swift and deep. Once the 10yr (driver for mortgage markets) broke above 1.80% or below 1.70% volatility would increase while investors and traders made the adjustments to the breakout. Now a lot of questions about where interest rates will head now. We will be able to see it a little more clearly next week after the FOIMC meeting and what happens with the BofJ meeting, and all of the key data to be released next week. In the meantime, price action and the models are now bearish.

If you one thing to grab as to why the bond and mortgage markets increased this week, I believe it was the rhetoric out of Boston Fed Pres. Eric Rosengren, one of the biggest doves at the Fed commented in a speech that markets were not taking another rate increase seriously and that the Fed is (essentially) closer to an increase than markets believe. That one of the doves flipped got attention, enough to push rates out of the three-week malaise. Once the 10yr edged above 1.80% it set off a number of stops that been placed to close out and end many of the long positions that had piled up since the drop in rates began on March 23. Obviously there is more to it but I believe his remarks tipped the balance.

Inflation concerns at these low levels also a key factor - crude oil increasing leading other commodities higher, the recent decline in the dollar, and hawkish comments from a parade of Fed officials finally broke the dam. Interest rates at these historic low levels will be touchy to any contra news, whether important or not.

As the indexes increase the demand for safety decreases and push interest rate prices lower, yields higher. My view is and has been, that US and global stock markets are heading for a huge break.  What I do not know and cannot accurately anticipate is when and at what level markets will roll over. When it happens interest rates are likely to drop to new all-time lows. In the real time world though we have to work with what is going on now and where money is flowing. My opinions, the opinions of others must take a back seat to what is actually happening.

Next week has a lot of data to absorb, and that could be another reason why the markets are prepping itself for that.  Do not fight the current rate increases, or debate whether it is right or not.  Markets are always right for the moment, maybe not in a wider outlook but fighting it usually will lead to mistakes.  

In summary, the best strategy from here on out was stated yesterday in my report - if you have not locked yet, be aware that the current momentum toward higher rates are the strongest since early March.  Then, as now, it does not make much sense to bet against that momentum until it has leveled-off or reversed course.  There is always some chance that could happen next week, but chances are at least as good that it will not happen fast enough for you to risk it.  The trend is not our friend, as I have been locking everyone who is closing within the next 30 days, and will continue to do so.  Floating borrowers need to have clear strategies in place, and "just waiting until rates come back" is not a strategy!