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Fundamental Week
The abundance of fundamental data this week provides a good opportunity for mortgages to improve. If the data shows weakness in the economy with little or no inflationary pressures then it is possible for mortgage bonds to rally resulting in mortgage interest rate decreases. However, if the data shows that the economy continues to rebound or any significant signs of inflation, mortgage bonds may fall pushing mortgage interest rates higher.
Mortgage interest rates remain historically favorable despite some recent increases. Now is a great time to avoid the uncertainty surrounding continued market volatility. Remember, the future is uncertain with so much global economic instability. Euro troubles have helped rates here at home. Any signs of stability in that region could reverse the flight to quality buying of US debt that has helped rates stay low. Caution is key.
Dana Bain Premiere Mortgage Services Inc. www.BainMortgage.com 978-422-2311
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The Year Ahead
The future of the economy, recovery or additional weakness, will continue to be debated. There is no certainty in predictions. Data can be used to support both sides of the debate. What we can be certain of is the fact that mortgage interest rates are likely to remain volatile until the economy gains some stability. Historically, mortgage interest rates seem to improve slowly. In contrast, when rates increase, it is often fast and furious. One negative day often erases a week of positive improvements. Of course even that maxim was tested the last few months of last year as market swings of 1/2 a discount point both up and down were often seen in very short spans of time.
It is possible for mortgage interest rates to push lower considering the Fed still wants to keep rates relatively low. However, we are in unprecedented times and we have seen rate volatility throughout last year. The Fed isn’t the only player in the financial markets and there are many others buying and selling securities. Remember that the Fed does not directly dictate that mortgage interest rates will be at a certain rate. Rates are determined by the supply and demand for mortgage-backed securities. However, the Fed is the major player in the market at this time and they do set the lead.
Despite volatility throughout 2011, the Fed kept rates low. The big unknown is how things will play out this year. Now is a great time to take advantage of mortgage interest rates at these still historically favorable levels.
MORTGAGE MARKET IN REVIEWNewsletter-January 2, 2012
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Fed Statement
The Fed statement from the meeting last week indicated, “The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.” This is generally good news for mortgage interest rates in the short term as the Fed buying keeps MBS prices high and rates low. However, this is no guarantee that mortgage interest rates will continually push lower. The Fed noted they will “regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.” Rates are historically very favorable and financial conditions can change daily. Remember, the current rates are a given.
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Disparity
The 10 and 30-year Treasury bond yields are often viewed as “benchmarks”, reflecting the overall state of interest rates in the US economy. Many people concerned about mortgage interest rates track these bonds as a barometer for mortgage interest rates. However, in reality the Treasury and mortgage markets trade independently.
The supply and demand characteristics of Treasury bonds and mortgage-backed securities (MBS) differ significantly. Treasury securities represent money needed to fund the operations of the US government. MBSs, on the other hand, represent borrowing by homeowners.
Information related to Treasury bonds is relatively easy to come by. Almost every major news medium reports changes. On the other hand, accurate mortgage interest rate information is difficult and costly to obtain.
In the absence of information directly related to the mortgage interest rate markets, Treasury information can be useful in that the bond market generally trends in the same direction. However, mortgage interest rates can vary significantly. In fact, many times the Treasuries will trade wildly while MBS only see minor price changes and vice versa. Thus, differences between Treasuries and MBS sometimes lead to misleading price change differentials. Last Wednesday mortgage-backed securities closed down 2/32nds on the day while the 10-year Treasury fell 25/32nds and the 30-year Treasury fell 64/32nds. This is a prime example where anyone that looked solely at Treasuries thought the mortgage market was worsening when in reality mortgage interest rates were near unchanged on the day. The data provides a valuable lesson into the differences between treasury bonds and mortgage-backed securities. This is just another example of why looking solely at treasuries can lead people to the wrong conclusions.
Keying in on the correct information can mean the difference between making and losing a tremendous amount of money when making float and lock decisions in the short term.
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