Mortgage Rates in a Waiting Game

Mortgage rates moved, but it was not the direction one would want to see.  For the past several weeks, we have seen the rates slowly drift to three-year and close to all-time lows, that today’s movement is really not too much of a surprise.  This morning I mentioned that I was concern and that if you were going to close in the next few weeks, it was time to lock in.  Yesterday, we saw the turn, and ever so slight as it was, that turn had a little momentum to carry the MBSs into negative territory for the second day in a row.  The 10yr did not move much from the open as it held steady at 1.61% all day. 

Here are some interesting comments from Louis S. Barnes weekly commentary:

So, the interest rate for US mortgage borrowers is determined by London bookies? So it is, and for one more week. And the result, briefly, rising now: US 10-year T-note to 1.55% and mortgages near 3.50%, both five-year lows (note that overseas money prefers Treasury’s to MBS, the yield spread widening).

Rate movements domestic and global are usually driven by new economic data. This week’s movements were unusually powered by individuals, and even more unusually individuals acting on principle.

We’ll have election results here next Friday morning. If Brexit, like so many things, “Buy the rumor and sell the fact,” no big immediate deal. The world has had a lot of time to prepare. If Remain, the EU and euro will still be in the same trouble, the mere fact of a close-result exit referendum damaging to both failed structures.

The most important long-term event: Chair Yellen’s five-stars-for-principle performance on Wednesday. “We are quite uncertain about where rates are headed in the longer term.” Any Fed chair can turn on Greenspan’s fog and smoke machine, but it takes guts to speak truth, likewise implicit acknowledgement that Fed forecasting has been terrible for the last half-dozen years. The Fed has forecast a rapid return to 2% inflation, and Fed funds rate normalized to 4% ever since 2012.

Everyone has an opinion, but what Louis Barnes talks about are the facts.  I have kept an open mind about all the rhetoric and it seems like we are in a waiting game as I do believe that today’s mortgage bonds and treasuries have already priced in the exit.  Some are now leaning that if it does not happen, it really does not matter, as the system is in shambles and there is too much work to have it corrected.

In summary, the question is whether or not rates will continue to operate near these ultra-low levels.  The last time we were in this territory, there was a sharp bounce back, although the conditions leading up to those lows were different than current market conditions.  We've also spent more time holding ground in the low range this time around.  Thus, there is some hope that we're establishing a new normal.  The market was due for a breather, and right now we are seeing it.  Question yet to be answered is if this is a pause before we test new lows or the beginning of resistance and a move to higher rates. Personally rates are so attractive here it does not make sense to guess the future. If you were brave enough to wait to this point now is the time to call it a day.  All that being said, I think we are yet to see the bottom for rates, but the question is how long until then?