As you know yesterday was one of the worst days for mortgage backed securities we've had in a while.  No one wants to buy and everyone wants to sell.  Volume was EXTREMELY LOW!  Demand was EXTREMELY LOW!  So according to Econ 101, when demand is low, sellers lower prices to entice buyers.  The lower the price, the higher the yield, thus the higher the mortgage rate.

Inflation seems (again, and as always) to be the looming concern driving the fear of bonds right now.  As the likelihood that FED rate cuts will be more and more aggressive, the inflation hawks start squawking (and with good reason).  Data and sentiment indicate inflation is a justifiable concern.  Why are bonds afraid of inflation?  Because bonds return a fixed income for investors that buy them.  The more inflated the dollar, the less valuable the bond.  At any rate (no pun intended), this is a fantastic point with which to educate yourself and share with everyone you know.  It's really important for mortgage brokers and consumers to understand that FED RATE CUTS DO NOT EQUAL MORTGAGE RATE CUTS.  Aggressive cuts usually hurt mortgage rates for the reasons noted above.

Most of he data is certainly on our side:

1. Empire State Manufacturing Survey: This index tracks general business conditions and was forecast at 5.75 today, but only achieved a reading of -11.7.  Weak manufacturing sector = weak economy = weak stocks = strong bonds = better rates (normally)

2. Jobs Data from yesterday was weaker than expected

3. Industrial output today failed to make a significant gain , and was only positive because of the extremely high prices of utilities and energy combined with inelastic demand.  In other words, this report hit expectations today, but without the data skewing factors, it would have been down by a significant amount.

4. Consumer Sentiment Continues to plummet.  Expected to come in at a 77.0 level, the Consumer index only achieved a reading of 69.6

All these things would normally be good for mortgage rates, but that assertion only holds true in a market with restrained inflation and investor appetites for bonds.  In recent  weeks, MBSs have received a deadly one-two punch from decreased appetite for mortgage securities and the stronger punch of inflation concerns.  In data released today, import prices rose appreciably from a consensus of .5% to a reading of 1.7%.  This has direct bearing on inflation. 

So despite the bond friendly data from today and earlier in the week, the inflation concern and the lack of demand for bonds are pushing rates drastically higher.  Don't expect relief either until inflation indications diminish.  We've seen several days recently where both stocks and bond prices declined at the same time.  This is always bad news for mortgage rates as it indicates that the normal economic factors are not affecting bonds.

Even though I hate to recommend a lock when the market has risen so much, I'm not convinced that economic data alone can push rates lower in this environment (an environment that has only really sprung into existence in the last 10 days).  When this much bond-friendly data can hit the market without even making a dent, it's time to be afraid of the dark horse: inflation.  I would be hesitant to float anything until inflation is in check.  To make matters worse, if we get any positive economic data, it will have an unusually strong impact.

If you want to roll the dice a bit, you may be OK floating through the weekend.  Next week is extremely light in terms of data.  It could be very volatile.  Here's the bottom line: the money you'd save by floating if the bond yields goes down is insignificant compared to the money you'll lose if bond yields go up.  In other words, an incorrect lock decision won't hurt as bad as an incorrect float decision.  No one can predict the next 7 days with any measure of accuracy, so play it safe.