Mortgage Rates Steady After Blast

Mortgage rates were basically steady all day as it seems like everyone is still licking their wounds over the blast that was seen after the FOMC had their minutes released on Wednesday.  If you talk to various lenders as I have in the past few days, we all have seen an increase in rates resulting about an eighth of a point higher. With that, the damage seen on Wednesday is still very much intact.

In terms of the outlook, two straight days of indecision in bond markets makes for my crystal ball to give me any type of direction to give to my clients.  I have stated before that the issues brought forth on Wednesday was an important day with fairly serious negative implications for the near term rate outlook.  It forced markets to reevaluate the likelihood of a June Fed rate hike.  What we do not know is whether or not that reevaluation is complete.  Today, there was some discussions that the soonest the Feds can make this move is now in July, with all that is happening in Europe.  History suggests far bigger moves are in store, but it could take weeks for those moves to start taking shape.  Between now and then, the incentive to float one's rate is limited.

The world of credit market professionals was rocked this week, even those in the Home for Old Traders, by release of the Fed’s minutes from its April 27 meeting. On Wednesday these minutes hit hard, but 48 hours later have fizzled.  New data have indeed shown a rebound from the 1st quarter, and post-meeting every Fed speaker has read from the same script - financial markets have underestimated the future fed funds rate. The warning could not be clearer.

Are we back to 2014-2015, the Fed yelling “Wolf”? Is the Fed trying to jawbone markets into tightening for it? Who is right, markets priced (barely) for one hike by the end of the year, or the Fed choir insisting on two or three, and then beyond?  The Fed intends to brake the economy to a lower level than now, and thinks it can “fine-tune” this way without aborting recovery, and even if it does abort should pre-empt our unsustainable overheating.

In summary, it was a bizarre week for mortgage bonds as we see the 10yr now at 1.84% from 1.71% last week, and MBS lost 55BPS.  The technicals are bearish near term but if there is anything comforting the 10yr and MBS prices moved to their 100 day averages on Wednesday’s selling, both managed to hold at that critical level. What does the future hold is still anyone guess, but for right now, if one is contemplating what to do with the current rates, my suggestion is to weigh out your risks as you now know if you have not locked in by now, can you afford to lose anymore from where it was earlier in the week?