November 8, 2013
Mortgage rates shot dramatically higher after today's long-awaited Employment Situation Report (also referred to as "NFP" to save space and because the headline component of the report is "Non-Farm Payrolls"). Trading levels in the secondary mortgage market (MBS or 'mortgage backed securities) fell off a cliff immediately after the report, well before any lenders released their first rate sheets of the day. Lower MBS prices translate directly to higher rates.
In most cases, today's rates are .125-.25 percent higher than yesterday's. The most prevalently quoted conforming 30yr fixed rate for ideal scenarios (best-execution) therefore rose to 4.375% and in some cases as high as 4.5%.
Yesterday we discussed the fact that bond markets were setting up to digest the jobs report from the center of their recent range and that the outer boundaries of that range likely represented the targets for a very strong or very weak reading. We got the strong reading and rates wasted no time in moving precisely to that 3.375-3.5% boundary seen in mid October.
Why did the jobs report have such a big impact?
First of all, as far as large changes in NFP go, this was only slightly bigger than average. It would normally result in slightly less drama for bond markets (and consequently mortgage rates) had it not been for the steady downtrend in job growth in the past few reports. In other words, it went against the grain just went markets were becoming convinced that the Fed couldn't possibly be justified in reducing asset purchases at the upcoming December meeting.
To be clear, that initial reduction in asset purchases isn't necessarily the be all end all of mortgage rates, but it would signal that the Fed was ready to start making their way to the exit. This is the potential shift that sent rates skyrocketing in May/June/July. The decreasing sense of urgency regarding this shift sent rates lower in September and October. Today's data sends the sentiment quickly back in the other direction.
Whereas primary dealers and economists were in relative agreement that the Fed wouldn't move to reduce asset purchases until March 2014, after today, we expect the next survey to show a noticeable shift back toward the Fed's December meeting. It may or may not happen in December, but until today's jobs report, most market participants wouldn't have given it much of a chance of happening. Now that there's some chance, bond markets are adjusting accordingly. That means prices are falling and rates are moving higher.
Loan Originator Perspectives
"Wow, did we get blindsided this morning. Hopefully you locked your loan. If not, I would float over the holiday weekend(Monday is Veterans Day) and see where things are on Tuesday. The solid jobs report has done its damage and it appears we have found some support at 2.74ish on the 10 year. " -Victor Burek, Open Mortgage
Today's Best-Execution Rates
- 30YR FIXED - 4.375 - 4.5%
- FHA/VA - 4.25%
- 15 YEAR FIXED - 3.5%
- 5 YEAR ARMS - 3.0-3.50% depending on the lender
Ongoing Lock/Float Considerations
- Uncertainty over the Fed's bond-buying plans and Fiscal Policy has been making for a tough interest rate environment where we're not seeing sustained improvement unless it's a correction to even bigger deterioration.
- The Fed's bond buying is the key consideration--not just the initial reduction (aka "tapering"), but the general pace of withdrawal. We've gone from tapering being a "sure thing" in September, to it being on hold until March 2014, and now December 2013 is increasingly possible after the most recent Employment report on Nov 8th.
- Markets continue to be most interested in economic data and its suggestions about the longer term trajectory of the economy. This will shape expectations for Fed policy in the coming months, and thus inform the direction of interest rates.
- The stronger the data the more likely the Fed is seen as reducing asset purchases. Rates would rise under this scenario, but the Fed indicated its cognizance of high rates creating headwinds for the recovery, and this suggests they'll attempt to keep the pace of rising rates moderate as long as inflation isn't adversely affected.
- (As always, please keep in mind that our Best-Execution rate always pertains to a completely ideal scenario. There are many reasons a quoted rate may differ from our average rates, and in those cases, assuming you're following along on a day to day basis, simply use the Best-Ex levels we quote as a baseline to track potential movement in your quoted rate).