Mortgage Rates Mix Ahead of FOMC Statement

Mortgage rates were initially lower this morning as global bond yields continued to drive to record lows.  There was widespread coverage in financial news of Germany's 10yr bund yield dipping into negative territory.  With this news and all that is happening with the vote to be taken next week, the flight to safety in better money was on the US Treasury, which was at one point down to 1.58% today.

Then we saw MBSs decline this afternoon along with the yield of the 10yr going up to the close of 1.62%.  Nothing fundamentally has changed, markets prepping for tomorrow’s FOMC policy statement and Janet Yellen’s press conference. It has been a good run lower in rates, but we saw traders lightening up. There is absolutely no chance the Fed will make a move tomorrow, and not likely in July either.

The policy statement tomorrow is likely to be about the same as the previous statement - data dependent, inflation edging higher, employment improving. Comments about the UK vote and what the FOMC thinks and increasing declines in global rates, how with the FOMC frame it and what comments Yellen will provide at her press conference.  The May employment jobs report will be referenced as a possible anomaly. The Fed wants to increase the FF rate and will make an effort in the statement to frame the economy positively, paint lipstick on the global slowing.  

There are important economic releases tomorrow morning ahead of FOMC in the afternoon with May PPI, the June Empire State manufacturing index, and the May industrial production and capacity utilization. Nothing has changed either fundamentally or technically. The bond market since the May employment report on June 3rd has declined from 1.80% to this morning’s low of 1.58% - a big decline in 9 sessions. The bullish outlook is still in place but as the UK vote and the FOMC tomorrow approaches some lightening up of positions is not unusual after the huge recent moves.

In summary, worldwide bond yields continue to drift ever lower putting downward pressure on mortgage rates.  The risk of a reversal in this trend grows, however, as we get a Fed meeting tomorrow along with a press conference where Yellen’s language will be dissected carefully for meaning and then the vote by the Brits on whether they will exit the European Union.  All this creates more risk in my opinion for the short run.  I think if I were closing in less than 15 days I would be protecting all the gains of late.  Beyond that, it is just a gut check on your risk tolerance.