Mortgage rates came into the week on a three day losing streak. After a quick correction on Monday and Tuesday, mortgage rates ended this week on another three day skid.  The best par 30 year fixed mortgage rate is still 4.25%, but that's hanging on by a thread. 4.375% is almost the new "best execution" mortgage rate for well-qualified consumers.

This is what we wrote on Monday....

View it as professional traders attempting to spark some excitement. See it as profit churning, but investing sentiment currently favors riskier assets. Stocks might rally just because it is the path of least resistance and the easiest way to create an acceptable return. Even though this type of rally would be built from glass, it would still come at the expense of bonds, and mortgage rates.

That basically sums up how this week went. Stocks rallied despite mixed economic reports on manufacturing, inflation, consumer spending, and consumer sentiment. The rally was choppy and inconsistent, it almost seemed forced by a lack of resistance (like freebies at Costco).  Bonds and mortgage rates suffered as a result. 

But things got interesting today when stocks sold off aggressively after finally finding firm resistance at a key technical level. The extent to which this technical inflection point was rejected by the market implies stocks are about to move lower and bonds are set to rally. Unfortunately that sentiment fades when you peer a little deeper into the make up of the sell off. It occurred in a quiet trading environment. This implies weakness could've been over exaggerated, just like rate sheet weakness was last Friday. This leaves the door open for a rebound rally in equities on Monday. But even then, it seems like stocks will need to break that critical inflection point (S&P 1130)  before interest rates really react and selling snowballs.

This leaves in the same position we were in last week. So the same advice applies:

After a summer of "record lows" and non-stop rallying, consumer borrowing costs seem to be reversing course. Now what?

We might have seen the lowest rates we're ever gonna see, if that is the case, then those rates are already behind us so it doesn't matter. But I think rate watchers with waiting time should sit back for now and see how this latest shift in benchmark yields plays out. If push comes to shove and we need to pull the emergency chute, we will alert. 

Plain and Simple: Considering how well our technical support levels have held up, I am not ready to sound the ALARM BELLS yet, but we remain in a state of HIGH ALERT. We think it's worth the risk of floating on a day to day basis though, just to see how the market reacts to higher yields. We can't rule out the possibility that the "correction" is done already. But we must stay defensive...


Because bond selling tends to snowball, and if selling snowballs, mortgage rates would rise quickly.