Mortgage Rates Unchanged Following FOMC Report

Mortgage rates ended the day relatively unchanged, which is surprising with all the various data points that were released today that could have moved the market one way or another.  Chief among these was the most recent installment of the Fed's policy announcement.  While the Fed was not necessarily expected to make any policy changes, investors were still scanning for clues about the next Fed statement.

The FOMC policy statement was the usual stuff with nothing new. There was no mention in the statement about the Fed thinking about lessening its balance sheet as was the talking points a week ago. The same insight into the economy - labor market increasing, inflation still under 2.0% but approaching the level. The comments divined about further rate increases were capped by the usual market dependency caveat. Q1 weakness is considered transitory, not news to most of the market, Q1s have been weak for the past three years. “Job gains were solid, on average, in recent months, and the unemployment rate declined” – I gather someone missed the March report of 98K new jobs, or maybe the Fed knows what Friday’s employment report will show.

Odds that the US Federal Reserve will raise interest rates in its June meeting jumped to nearly 94% this afternoon after the Fed played down the recent spate of weak economic data and said the slowdown seen during the first quarter was “likely to be transitory.”  I will not argue the trade but at 94% it is too high given the doubt about the economic growth we have going forward. Trading in FF fund futures is very volatile and like the Fed, data dependent on each hard-economic report.

The market reaction to the FOMC, the 10yr yield increased from 2.29% prior to the release to 2.32% and MBSs declined even further to a negative 17BPS.

In general, the announcement amounted to an optimistic deliver of several pessimistic developments.  Some investors were hoping the Fed would pull fewer punches on the pessimistic stuff.  In general, economic pessimism goes hand in hand with lower rates.  Due to the lack of outright pessimism, the market’s reaction saw the 10yr yield increased from 2.29% prior to the release to 2.32% and MBSs declined even further to a negative 17BPS.

The current environment continues to be one of higher risk and reward when it comes to floating vs locking.  Both stocks and bonds look increasingly ready to make a bigger move in either direction.  With no immediate push to put money back into bonds, interest rates will not go lower. They are just waiting for the right motivation.  Since it did not come today, it could very easily come in the next few days or on Monday following the French election.

In summary, we had no whammies from the Fed today, but that still has not stopped bonds from moving higher.   With jobs report up next on Friday, it is highly risky to float.   I find that my clients are choosing to lock in at current pricing to avoid their rate jumping higher.  As a reminder, rates get worse much quicker than they ever get better.  With the 10yr unable to break back below 2.28, it is a good time to lock for the next 30 days.