Wednesday, March 25, 2015 - Article by: Bart Castelli - Homestar Financial Corporation NMLS #70864 -
Mortgage rates unfortunately took off in the wrong direction after my morning commentary, something that has not been done for nearly two weeks.
This morning both the bond and MBS markets were acting a little peculiar. The stock indexes were under pressure but there was no movement into treasuries. At Noon the hammer dropped when the results of the 5yr note auction were released, which showed that the demand for this note was the weakest in the last four years. This follows yesterday's 2yr note auction which was also soft.
Why the weak demand? The swing seen recently in the dollar and increasing thoughts that Europe is about to improve. Germany's IFO Business Climate Index in Germany beat expectations. Earlier this morning US February durable goods orders were much weaker than estimates but looking back on it there was no positive response in the bond and mortgage markets as I would have expected. A number of us should have seen the weak auction coming, stocks were falling yet nothing was improving in the rate sector. Love the hindsight, it is always clear.
A little perspective - the 10yr and mortgages have experienced a strong rally since the strong February employment report on the 6th. From that day's high of 2.25%, yields have declined rapidly, mostly on oil prices dropping and the dollar strengthening. I still hold that rates will trend lower but it was time for a bounce back after the swift improvements. Treasury auctions so far this week have not been so strong after the recent decline - even the weaker durable goods data this morning could not bridge the selling. Traders are now focusing on tomorrow's 7yr auction, which now looms heavy over the market. And of course, let us not forget markets expect the Fed will move in June.
There is no reason to panic now, as long as our work remains bullish, however while still staying bullish the 10yr could move back to 2.00% and MBS prices could increase as much as 85 bps taking the rate back up. Much of the motivation a number of us are seeing is to expect for lower interest rates is the equity markets. Unfortunately, last year at this time I expected the stock market to enter into a sizeable correction, but I was wrong even though we did get a taste before issue in Europe and the Ukraine heated things up. This time, it may be just a brief shakeup. You have read here that I have been mentioning that market volatility would stay excessive. Even though markets took a slight breather, volatility has returned.
In summary, today's move in rates shows why locking is always the safe move even if you think rates will go lower. Rates could see a reversal and could go down. However, confirmation of technical levels broken yesterday could not hold today. There has been two weeks of gains and locking up now makes sense to me, unless you have better insight or know something that I do not know. All I can say is weigh out the risk versus the reward.
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