Mortgage Rates Mixed - Is This the New Norm?

Mortgage rates were mixed today as we saw the rates hit the highest marks we have seen this year during the first week of January.  What was strange today was that bond markets improved this morning, which typically allows banks to offer lower rates, but many of the banks are understandably hesitant to pass along market gains without seeing some more stability.

This past week was one of the worst weeks for mortgage rates on record.  Today was more of an afterthought compared to the past three business days.  Revisiting the question from yesterday – is this the new norm?  As is always the case, there is never any way to be sure what the future holds when we are dealing with financial markets.  Although past precedent suggests a good possibility of a bounce back, there are examples of similar movement where rates did not make it back below the levels seen on the 4th day of the move (which is today in the present example) for an entire year!  That alone is a big enough risk to dissuade all but the most aggressive risk-takers from trying to time the top of the rate market for now.  If we see a more substantial push back toward lower rates, it will go a long way toward easing fears that we are repeating the scarier examples of past rate spikes.

Markets still largely focused on the Trump win. No announcements from his people but there are a lot of speculations about who will get the key cabinet jobs. There is a 100% belief now that Trump will launch a fiscal spending stimulus with infrastructure investments. Tax cuts with deductions cut. A tax package that will encourage companies to repatriate their profits back into the US. A re-work of Dodd/Frank but still not opening the door for banks to go wild once again. All the talk from media and pundits focusing on what Trump campaigned on.

The dollar is on a rampage higher since the election - higher interest rates expected improving the dollar. Global markets buying the buck is another confirmation that interest rates are going to increase in the US.

Trading in the FF futures markets now at a 94% probability that the Fed will move in December as it is well baked in the cake in the markets. The focus of the meeting next month will be on the FOMC take on inflation increases and hints about what the next meeting will hold.

By all accounts the bond and mortgage markets have currently overrun the underlying fundamentals - betting on increased inflation, a Trump presidency that will increase growth. No doubt fiscal spending will increase but I do have my doubts that it will not increase deficits. It is disappointing that mortgage prices did not do better today - some gains but not much. The incoming data this morning dragging on the potential of near term improvements we believe will occur. That all said, given the magnitude of the initial reactions to the election, I am being very conservative about fading this rally.

In summary, after the huge move to the worse for mortgage rates, I was so hoping we could see a nice relief rally.  Well, we are not getting that today but we are seeing some improvement.  Might we get a rally in the days ahead, sure, but the trend is not our friend right now.  I am of the belief that this recent move following the election is too much, too fast, without the proper foundation.  As "normalcy" sets back in, we start to see improvements just out of risk adjustments.  The recent trade caught most people by surprise.  I am banking that it will be short lived.