Mortgage Rates Respond Negatively to Data

Mortgage rates moved higher today by reacting negatively to this morning's economic data.  Heading into a long three-day weekend, stock indexes generally were quiet. But in the MBS markets, there was another volatile movement in prices.  Monday all US markets will be closed for MLK birthday celebration, the rest of the world will be working. 

Big banks made a splash this morning with much better earnings than expected.  More trading after Trump’s election was given as one reason. December PPI did not boost inflation concerns. December retail sales at brick and mortar stores - sales flooded the internet, with purchases of autos exceptionally strong.

The currency markets are in volatile conditions after the US dollar increased since the Trump win. Foreign exchange has taken a front seat in the interest rate and economic world, never in the back seat but this week we noted an increasing concern that the dollar is too strong, or saying it another way, many foreign emerging market currencies are now so low that it is dragging economies lower. Every country wants a currency edge, lower makes exports more profitable, higher hurts domestic exports. The stronger US dollar has supported the US bond market - recent trading of US treasuries has been directly tied to the dollar’s movements That is about to change as I expect a slow move down in the dollar now - expect more intervention from emerging markets and China to keep their currencies from falling further. Likely we will see it soon after Trump is inaugurated - once he is in those lofty expectations are likely to wane somewhat.

Housing and Urban Development Secretary designate Ben Carson is open to finding alternatives to the 30-year fixed-rate mortgage, but believes there must be some government backstop to the housing market. He also said he was going to carefully evaluate the Federal Housing Administration's plan to cut annual premiums. The Department of Housing and Urban Development announced Monday that it was cutting the annual premium by 25 basis points, but it does not take effect until January 27. If Carson is confirmed quickly, he could be in office in enough time to delay or reverse the decision. Carson did not say he was against the cut, so let’s not lose our cool yet. Pat Toomey, R-Pa. expressed reservations about the premium cut, arguing that the FHA's mortgage fund had not sufficiently recovered from the financial crisis. He noted that the portfolio of FHA loans had ballooned to $1.2 trillion in 2015 from $245B in 2006.

In summary, markets giving away much of the recent gains, but remaining under key support levels.  It has been tempting to consider floating, but since the market has been resisting moving lower the recommendation is to lock in.  We are getting closer to feeling comfortable with the current range of 2.34% - 2.44% on the 10yr bond, a more risk tolerant or sophisticated individual may float as we approach the higher echelon and lock as we approach the lower, but I personally do not see the overall gain meriting the risk if we break the support level of 2.44%.