Mortgage Rates Have Been Through a Rough Couple of Days

Mortgage rates moved moderately higher again today, as investors continued digesting the possibility of a "taper tantrum" in Europe.  The US version of the taper tantrum occurred in 2013 when the Fed began signaling its intention to buy fewer bonds.  Fed bond buying was a key motivation for the all-time low rates seen in 2012.

What really amazes me is the longer I am in this business the more stupid things are becoming. I am getting fed up with central bankers and their apparent lack of brain power. On Monday Mario Draghi shook markets yesterday when he made bullish comments that markets reasonably took that he now was leaning toward beginning to taper. The German 10yr bund increased about 40%,  the US 10yr increased 7BPS with the stock market diving, and the euro currency jumped $0.0145 - one the biggest increases this year.  STOP THE PRESSESS – the markets reversed when ECB senior officials relayed their concerns that investors had “misjudged” a speech which also called for “persistence” and “prudence” in the future path of monetary policy. Then we have the IMF saying the dollar was too strong, so along with Draghi remarks the dollar is falling quickly now.

Meantime our Federal Reserve keeps running mouths, yesterday SF Fed pres. Williams said  the US economy is "transitioning" from recovery to ongoing economic expansion, having achieved full employment  with inflation moving toward goal 2%. Confused yet?  Minneapolis Fed President Neel Kashkari (FOMC voter) defended his dissents on both the March and June rate hikes last night. He asked, "What's the rush?" with respect to removing monetary policy accommodation: "We're not seeing wages climb very fast, and we're not seeing inflation. That tells me the economy is not on the verge of overheating."   I realize the Fed wants and needs to increase the FF rate but his remark is Quixote thinking. No growing economy (the IMF lowered its US growth forecast from +2.5% to +2.1%) the Fed’s own quarterly forecasts issued at the June FOMC meeting was US growth not exceeding 2.1% for the next two years. As for inflation, it is not increasing as Williams thinks (also deviates from the Fed’s quarterly forecasts) and our take is that it will not increase anytime in the foreseeable future (this year). Mix in comments by Bank of England Governor Mark Carney that rate hikes may happen sooner than previously thought.

What amazes me is that markets take every word out of central banker’s mouths as the last word and biblical. The reason for the frustration - I must go with market reactions even though it is stupid too often. Line up the lemmings as they head for the cliff.

In terms of lock/float strategy, these developments suggest a more defensive stance (i.e. erring on the side of locking) is in order until markets have settled down.  At the very least, you should have a stop-loss in place overhead.  That means picking a rate (it could be a mortgage rate, a level of closing costs, or even a benchmark trading level in 10yr Treasury yields) that's higher than what you're seeing today, and committing to lock if rates move any higher. 

In summary, it has been a rough couple of days for those on the float boat. Bonds stumbled through a directionless day today after yesterday's substantial losses.  Until we see positive momentum, I have to be defensive here, especially for loans closing within 15 days.