Mortgage Rates Extremely Volatile in Early Trading

Overnight, interest rates continued to increase after the run-up yesterday, but as the sun rose in the east the 10yr and MBS prices began to moderate.  In early trading as the MBSs were off by more than 22BPs (on top of the 79BPS we lost yesterday afternoon).  The 10yr was trading at 2.62%.  As of 9:30AM, we see that we have gotten some movement back towards yesterday’s close, as the 10yr is now at 2.58% and MBSs are down 3BPS.

The Fed did what markets were expecting, increasing the FF rate by 0.25%.  The “surprise” if you call it that was the Fed in essence said there would be three increases in 2017 instead of two that markets were thinking. That in itself should not have caused the depth of selling in MBSs or treasuries but the Trump rally has built increases in inflation as investors are expecting strong growth in 2017 and 2018. Let’s put a little perspective here - interest rates have jumped 80 bps since the election, that is significant in terms of percentage increases. Seen in a wider view interest rates are still very low even at 2.60% for the 10yr and 30yr mortgages closing in on 4.50%. No doubt the swift increases have rattled consumers and many investors but we should have expected it with US equity markets going all in on belief growth next year will exceed prior forecasts before Trump; increased wages, less regs, lower taxes.

Janet Yellen and the Fed did not bite on the Trump rally. The Fed’s forecasts, also released yesterday said growth in 2017, 2018 and 2019 would not exceed 2.0%, the rate of growth the US economy has had for the last five years. On inflation, the Fed’s forecast for core inflation does not exceed 2.0% thru 2019. Thing is, the Fed’s forecasts for the last three years have failed to meet the potential growth and inflation expectations so the Fed as with other central banks are becoming increasingly irrelevant to investors. The Fed does not see much benefit in tax cuts or reducing regs as a spark for more growth. Yellen commented yesterday that only a few Fed officials have changed their forecasts because of the Trump win. Markets and the Fed moving on different paths now.

Two data points this morning came in near or at expectations, Weekly Claims, and November CPI. December Philadelphia Fed Business Index, and the December NY Empire State manufacturing index, each of these came in stronger than anticipated.  The last data point was December NAHB Housing Market Index, which came in at the highest levels since September 2005.

Already today the bond and mortgage markets have continued to be volatile.  Banks are not likely to jump on any price gains today, and I do not expect them to improve prices unless there is a major reason and a huge jump in prices. My suggestion is to lock and take this rate now, even if you are closing more than 30 days out.