Mortgage Rates Significantly Higher

Mortgage rates jumped significantly higher today, relative to the almost perfectly flat trend that has been intact for more than a week.  We were already a bit cautious due to yesterday's underlying market weakness, but today's move was far swifter than yesterday's imbalances would suggest.  Viewed in the context of 10yr Treasury yields--a common yardstick for mortgages, I have been playing defense while it held under 1.80% for more than a week.  It was one of the key levels traders were watching for a shift in momentum, followed by 1.84%.  Less than 2 hours after 10yr yields broke 1.80 this afternoon, they catapulted themselves well over 1.84 and settled at 1.85%.

 

Fortunately, (and we are talking about "silver lining" on a dark cloud here...) mortgage-backed-securities tend to undergo smaller versions of the movement seen in 10yr Treasuries, and today was no exception.  When we compute the "effective rate" for the average top tier mortgage borrower, we're only 0.04-0.05% higher today compared to a 0.06% increase in 10yr yields.  But mortgage rates are generally offered in .125% increments, so many borrowers will find that their scenario is now pricing out at that next 0.125% higher, albeit with a potential decrease in closing costs (or increase in lender credit, depending on the scenario).

Even with yesterday's absence of movement, we were already leaning toward locking being the best bet considering the nice run of long-term lows followed by the late-day market weakness.  Today's confirmation means we should stick with that instinct until and unless it is refuted by a bounce back toward lower rates.  There's some chance that could come as soon as tomorrow, depending on the European Central Bank Announcement, but it could just as easily push rates even higher. 

On Deck for tomorrow are Weekly Jobless Claims, Philly Fed and Leading Economic Indicators.  Not really too much until next week’s FOMC meeting.

In summary, mortgage bonds violated the upper boundary of the range today which is bad for rates.  I recommended locking yesterday just in case something like this was to occur and now that it has I would still recommend locking.  Bonds will be looking for a new range to bounce around in and it is very possible that the upper end of that boundary will be higher than where we currently sit.  I am still playing defense until we see some strong bond buying activity.    If you wish to float, you need hope for the 10 year to get back under 1.80.