The same problem that plagued mortgage rates in recent days where 3.5 MBS coupons were not trading in enough volume to allow lenders the opportunity to push rates below 4.25% is now at risk of causing a similar move in 4.0 MBS, which could make 4.75% the new normal in the primary mortgage market.
In the overseas trading session, positive developments in the ongoing European sovereign debt crisis soothed markets and led investors to reallocate funds into stocks. When the U.S. trading day got underway, positive econ data solidified those overnight gains and added a bit more momentum to stocks. We refer to this as "the risk trade being on". We would like to call special attention to the fact that the majority of bond market weakness was priced in overnight, not after U.S. economic data.
The run toward riskier assets was not a positive development for the bond market. 4.0 MBS prices fell to their lowest levels in over 6 months! Although the situation is bleak in the short term, the benchmark 10yr treasury note yield rose before stopping exactly at 2.96, the same level previously discussed as the outer limit our protective range. We mention the 10yr treasury here not because mortgage rates are directly linked to it, but rather as a barometer for overall sentiment surrounding the bond market. In that sense, it's a better guage than MBS, and the fact that, despite taking a beating, it remains respectful of it's recent range at least offers the possibility of recovery from here.
As AQ mentioned yesterday, it is now up to economic data to either serve as the nail in the proverbial coffin, and it has a real chance to do so between now on Friday with the release of Non-Farm Payrolls. Even though tomorrow's data could certainly cause markets to "lead off" in one direction or another, whatever happens on Friday will need to confirm that shift if it is to be a lasting one. Conversely, if rates worsen tomorrow and NFP is weaker than expected, we would likely see rates recover to somewhere within the recent range.
But as far as your decisions regarding mortgage rates are concerned, what actually happens is of secondary importance to what COULD happen in the short term.
What "could" happen is 4.75% might become the lowest rate on the board come Friday, thus, from that perspective, now is not a time to be playing the market. At least not for anyone who does not have the time to wait for our broader economic assumptions (segmented recovery, low inflation, weak labor market) come to fruition and lead rates lower again.
Bottom line: while the door is open for some long-term/strategic optimism for rates, the short-term/tactical strategies should favor damage-mitigation, defensiveness, and a conservative approach to locking in loan pricing. Once NFP hits on Friday, we'll know a lot more about how things COULD go and hopefully even a bit more about how they probably will go. And "go" they must because even remaining at current levels in the bond market would very quickly result in a lack of volume in 4.0 MBS which would all but guarantee the best rates available being in the high 4's. For today at least, even after heavy losses, we're still somewhere in between.
Today was a bad day overall. The best conventional/FHA/VA 30 year fixed mortgage rates have risen to a range between 4.375% and 4.750% for well-qualified borrowers. The best conventional/FHA/VA 15 year fixed mortgage rates are in a range between 3.500% and 3.875%. Best execution on a 30-year fixed loan for a well-qualified, no LLPA borrower is 4.50%.
Important Mortgage Rate Disclaimer: Loan originators will only be able to offer these rates on agency conforming loan amounts to borrowers who are have a middle FICO score over 740 and enough equity in their home to qualify for a refinance or a large enough savings to cover their down payment and closing costs. If the terms of your loan trigger any risk-based loan level pricing adjustments (LLPAs), your rate quote will be higher. If you do not fall into the "perfect borrower" category, make sure you ask your loan originator for an explanation of the characteristics that make your loan more expensive. "No point" loan doesn't mean "no cost" loan. The best 30 year fixed conventional/FHA/VA mortgage rates still include closing costs such as: third party fees + title charges + transfer and recordation + escrows (things like upfront MIP (if required), property taxes, homeowners insurance, accrued interest)".
The pressure is clearly on, but considering that the 2.75 to 2.96 range in 10 year treasuries was outlined weeks ago and that we still haven't moved outside that range suggests that the market has not found sufficient cause to do so. Today's trading says that the market believes that cause is arriving soon, and it's most reasonable manifestation will be Friday's NFP.
Plain and Simple: Floating at this point is basically making a bet that NFP will be weaker than expected, or a statement that you have a few months to wait before needing to pull the trigger. (February potentially)