Mortgage Rates Had a Wild Day

Mortgage rates had a wild day today!  Employment usually sets off volatility, today was one of the more volatile with employment looking very soft compared to what the pundits of Wall Street had expected. Jobs weaker than thought, downward revisions in August and July and average hourly earnings flat in September. The initial reaction took the bellwether 10yr down to 1.91%. In the thinly traded MBS market we saw a trade up 75BPS, but that went away quickly when MBSs settled down until this afternoon when markets turned around. The DJIA -260 at one point early, reversing to close up 200 points.

It all flipped this afternoon, those that read the morning commentary noted I warned it would likely happen. The 10yr did climb back to 2.00 before closing at 1.99% and the MBSs were a positive 25BPS on the day. Some still think in the markets that December for the Fed to move rates up the first time in 10 years. I would certainly like to have what they are smoking as that is no sure bet, the US economy is slowing, hard to find it tough because it is not heavily reported - only the positives make the front page. Since last December most market participants have been looking for a rate increase at ‘the next Fed meeting’.

Next week on Monday ISM services index. Tuesday 3yr note auction. Wednesday 10yr note auction. Thursday weekly claims, FOMC minutes from the September meeting, and the 30yr bond auction. Friday import and export prices. The only day next week that does not have a Fed speaker is Monday, every other day they are out in force, most of it not worth paying much attention. Fed speakers have worn out their newsworthiness.

Twice in just over a month the 10yr note yield declined to 1.90%, so far today’s move has failed to hold just as it couldn’t on 8/24. Rates at these levels become highly toxic, to keep them down here everything must be bearish and that is not likely. There is always something that points the other direction. Next week there is a lot of data of importance except Monday with the September ISM services sector. By the middle of next week markets will find reasons to ignore the reality of today’s employment weakness. I still expect rates have the potential to move lower but next week I expect some selling to move prices of MBSs lower.

In summary, mortgage rates improved again today, and more importantly we have broken through the bottom of a long term range.  Sure, it could only be a small test and next week we rise back into the range, but I certainly believe that floating is worth the gamble at this point.  Expect volatility next week.  If you like these levels, it is best to take them as it will take a lot to move MBS prices higher.