Mortgage Rates Moved Quickly Higher

Mortgage rates moved quickly higher today, more than erasing Friday's strong performance.  In fact, we are at the highest point we have been in the month of December.

Will the Fed increase rates? The FOMC meeting starts tomorrow but nothing for markets. Wednesday at 1:00 pm is when the action will commence with the policy statement that will be taken as a map to when the Fed will go again. The Fed does not know when it will go again, the Fed cannot accurately project growth or inflation, the record is there to see. The Fed has lowered its growth rate almost each quarter when it releases the Z-1 data. The Fed and ECB wanting inflation at 2.0% but that will not happen unless commodities begin to increase, wages increase, Asia’s economy improves and Europe grows. Yellen apparently believes all that will occur next year.

The data tomorrow we will have the November CPI, the December Empire State manufacturing index, and December NAHB housing market index. In the face of the FOMC unless CPI is way off those estimates, markets will not pay much attention in terms of taking any action.

No follow-through today from the bond and mortgage market rallies Friday. The same price action we saw two weeks ago when the bellwether 10yr broke its pivot at 2.20%, then it fell to 2.15%; two days later at 2.32% on the November employment report. Last Friday the 10yr fell to 2.13%, today 2.22%. The models continue to hold slight bullish biases but we deem them unreliable with present volatility. This afternoon selling took MBS prices back to levels we saw last Thursday.

In summary, our Friday rally may have been unexpected, but today's correction was predictable, given the FMOC meeting tomorrow, followed by their policy statement on Wednesday.  Pricing essentially returned to Thursday's levels, which were near the "worst" in the last month.  "Worst" in this case is not horrific, around 50BPS worse than recent "best" levels.  It's unlikely bond markets will post large rallies before Wednesday's Fed Statement, and what happens after that's released is a wild card.  While it's a forgone conclusion they will raise the overnight rate, the content and tone of their statement will be the influence on long term rates.  Borrowers floating better have high risk tolerance and realistic expectations of how much pricing could worsen.  If Fed Statement is bullish on economic conditions, rates could rise quickly.  Best bet is to lock.