Mortgage Rates React to Fed’s Announcement

Mortgage rates moved quickly higher after the Fed’s Announcement today.  While the Fed was, by no means, expected to hike rates in October, there was a risk that the statement would introduce some verbiage that opened the door for a rate hike in December.

The FOMC policy statement never fails to rattle markets regardless of what circumstances prevail.  It also brings out those that think they can decipher what the Fed is thinking. No different this time, the initial reaction pushed the 10yr note yield to 2.10%, its first support level and initially drove MBS prices down 38BPS on the day.

The statement was not new for what it said, it is what that was not said that generated most of the discussion. The FOMC removed a key remark from the previous policy statement that said global economic and financial developments “may restrain economic activity somewhat.” Those of us that saw this verbiage change as a possibility figured it would be a clear warning about where the Fed's collective minds were.

Many market participants agreed - having pushed out bets on the first rate hike to March of 2016 due to the recently downbeat economic data.  They figured there was little chance that the Fed would be hiking in 2015 with absent inflation and deteriorating economic conditions.  It came as a surprise that the Fed was not only relatively upbeat about the economy, but actually went so far as to change the verbiage that referred to rate hike timing.  That verbiage now specifically discusses "the next meeting" (December).  While it does not promise a hike at that meeting, it is a clear warning shot and markets reacted accordingly. Some pollsters have the change at 46% versus 37% just a few days ago.

Even though the 10yr Treasury and the MBSs got hurt, it was not that bad to set off major alarms.  Are these points a game-changer?  It is too soon to tell, but it does make a lot of sense to protect against that possibility while rates are still holding inside the recent range.

In summary, the consensus was that they would not raise rates, and they did not. Everyone wanted to know their tone and see what they said. They seemed to think we are doing a little better than last meeting and are not as concerned about China as before. So with a little bit of a hawkish view bonds sold off and hurt rates a bit. We will see where we go from here. A lot of data coming up and now the question is will they hike in December or not. In the short term I would think locking is still prudent unless some catalyst, most likely very bad data, appears to push us lower than the range we have been in. But we are still range bound, but will see how markets interpret things as we go forward.