Mortgage rates have been under upward pressure this week. Treasuries have sold off a bit since Monday, and mortgage backed securities followed suit. In fact, mortgage backed securities under-performed a bit in relation to Treasuries. This movement comes despite the fact that recent domestic economic data has been soft on balance. As has been the case for quite some time now, the day-to-day movement in bond markets appears to be dictated by expectations about the Fed, overseas influences, swings in oil and equities, and momentum.
What, specifically, has been the cause of the market movement over the past few days? I would hazard a guess that it may be that the market is pricing in the expectation that the Fed statement that comes out later today will be more hawkish than the last one. This is certainly a gross over-simplification, but I’m grasping at straws a bit here. Last week yields on 10-year Treasuries were around 1.80%, and right now they sit around 1.90%, and were as high as 1.94% yesterday. Whatever the reasons for the rise in bond yields, the fact remains that mortgage rates have been edging higher for a couple of days right now. This afternoon’s Fed meeting poses the threat that rates may increase further.
Click here to get today’s latest mortgage rates.
Today’s economic data:
The main event of the day is the Fed. The following is pretty much an afterthought:
- International Trade in Goods dipped in March. Exports were down by 1.7% and imports were down by 4.4%. The trade deficit narrowed accordingly, coming in at $-56.9B.
- The Pending Home Sales Index was stronger than anticipated in March, showing an increase of 1.4% versus the expectation of 0.5% growth. Year-over-year growth is still slow, and housing reports in general have shown signs of decelerating growth for months now.
- The EIA Petroleum Status Report showed that crude inventories were up by 2M barrels. Inventories are at record highs. Oil prices have been up lately, although I’m loathe to give you a solid explanation for that. With lots of oil producing countries saying they are going to raise output, I question whether recent gains are sustainable.
Don’t wait for rates to rise. Start your mortgage process now.
Today’s Fed meeting:
It’s basically a forgone conclusion that the Fed will not hike during this meeting. The implied chance of a hike based on Fed Fund futures prices is 2%. Really, this meeting is about crafting a statement that communicates to the markets that a hike at the next Fed meeting in June is a possibility. Right now the implied chance of a hike is 21%, which means that the markets have largely ruled out a June hike (and likely priced out the possibility), and the Fed probably wants to communicate that June is, in fact, a live meeting.
Making the argument that a June hike is a good idea is easier said than done, in my opinion. Inflation measures are still running below expectations, and some of them are weakening. Global headwinds and uncertainty persist (although oil prices have rebounded recently). On the other hand, the domestic labor market remains strong (although there are still no signs that we’re seeing real wage growth), and lack of inflation didn’t stop the Fed from hiking last December. I think that the Fed will emphasize that future monetary policy is data dependent, that they feel that they are confident that inflation will rise to target levels in the future, and that the labor market is strong.
This sort of message would be interpreted as hawkish, and I think that yields (and thus mortgage rates) will likely rise a bit in the aftermath. However, what I said above is far from a unique take, and as I said at the top, I think the expectation of a hawkish statement has been priced in a bit over the past week or so. I doubt we see a dramatic move later this afternoon.
There’s a good bit of data that will come out between now and the June meeting. If we see some strong labor reports, we might see a June hike, but I think there is reason to stay the course. We’re going to get a hefty dose of global uncertainty in June. Specifically, the British referendum on whether or not to stay in the EU occurs on June 23rd, while the June Fed meeting is on the 15th. I don’t think the Fed will want to hike before seeing what sort of market turbulence occurs in the wake of that vote, particularly if the UK votes to leave the EU. I think it’s much more likely that we get a hike in July or September.
Just to offer a counter-point to my guess: an April 7 WSJ poll of economists said that 75% of respondents anticipated a hike at the June Fed meeting. I tend to go with market expectations compared to economists, but at the end of the day, everyone is attempting to anticipate the future, an exercise that is often futile.
Click here to get today’s latest mortgage rates.
What’s the takeaway for rates?:
As I’ve said for weeks (months?) now, rates are favorable. Mortgage rates have risen off the lows of the year, but from a historical perspective, are still extremely low. When the Fed raises rates, mortgage rates will increase. It’s not a question of if the Fed will hike, it’s really a question of when. And that’s a question that nobody can answer with certainty*. If you’re considering refinancing your home, look into it, and if it improves your financial situation, I would tell you to go for it. It’s definitely worth a few phone calls. If you’re looking to buy a new home, now is a great time to lock in a low rate long-term. Don’t try to time the market. If you were to get a new mortgage today, and rates subsequently sank significantly lower, you can always refinance. The reverse is not true. My two cents, take it for what it’s worth.
*As I say with some frequency: if anyone knew the future to even a fair degree of certainty, they’d be sitting on a beach on a giant pile of money. They wouldn’t be writing about it here, or anywhere else.
Don’t wait for rates to rise. Start your mortgage process now.
Notable events this week:
Monday:
- New Home Sales
- Dallas Fed Manufacturing Survey
Tuesday:
- Durable Good Orders
- S&P/Case-Shiller Home Price Index
- Consumer Confidence
- Richmond Fed Manufacturing Index
Wednesday:
- International Trade
- EIA Petroleum Status Report
- Pending Home Sales
- Fed Statement
Thursday:
- GDP
- Weekly Jobless Claims
Friday:
- Personal Income and Outlays
- Employment Cost Index
- Chicago PMI
- Consumer Sentiment
from Total Mortgage Underwritings Blog http://ift.tt/1VSufrD
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