Mortgage Rates Moved Slightly Higher

Mortgage rates moved slightly higher today despite improvements in underlying markets into the afternoon. The Bond markets and Mortgage backed Securities (MBS) began weaker this morning with the stock market trading better, but by the end of the day prices are better than yesterday. Interest rates are flat-lined now and have been so for over two weeks, nothing has had any significant impact on rates or the stock market. Lots of forecasts out there that once the climate gets back to normal consumers will begin spending, would-be home buyers will begin to buy, manufacturing will improve and all will be right with the world. In the meantime US financial markets are trading in narrow, directionless ranges. That is likely to remain the case for a few more weeks, as long as winter storms continue to develop. Even with the slight improvements this afternoon, 4.5% remains the most prevalently quoted 30yr fixed rate for the very best borrower scenarios.

The over-whelming conviction is that the US economy will grow at about a 2.5% to 3.0% rate in 2014, even with the slow start. The Fed will continue tapering. The Fed will not increase interest rates this year, but will think more about it in the meetings ahead. Unemployment will continue to decline below 6.5%. Inflation won’t be an issue in 2014 or 2015. Interest rates will increase with the 10yr note climbing to about 3.40% by the end of the year and 30yr mortgage rates will increase 40 basis points in rate from current levels. A very rosy outlook; yet interest rates are not increasing and the stock market has stalled out at current levels. What’s up with that?

While the Fed and most every economist generally holds to the optimistic outlook; there is little real conviction in markets where the rubber meets the road and investors actually put up their money. Optimism always trumps pessimism in the human being; we would like to believe the forecasts but we and most traders and investors are like us from Missouri.

That's not to say rates can't improve, but gains are limited, and more of a serendipitous by-product of market considerations that are not dependent on economic data. Strong data, on the other hand, could have a noticeable negative effect.

In summary, despite economic data continuing to post much worse than expected results, rates have been unable to mount a rally.  Economists and talking heads continue to blame the weather as the one and only cause of the weakness. Monday we do not have any data on tap, and MBS managed to move higher following a weaker opening.   Is the reward great if one floats?  If such, I would do it with extreme caution!