December 23, 2014
Mortgage rates moved decisively higher today, fueled primarily by the lack of market participation common to this holiday week. Light staffing levels don't always mean rates will rise, but such moves are one of the risks when fewer traders are around. Here's how it works.
Mortgage rates are based on mortgage-backed-securities (MBS), themselves a part of the broader bond market. The most universal benchmark for "the bond market" is the 10yr US Treasury. If it's moving significantly, MBS will almost always be following to some extent. Treasuries were indeed moving significantly today, but it wasn't necessarily due to the strong GDP reading. That's an important distinction because strong economic data normally does push rates higher.
GDP may have been one ingredient. Certainly, there were others. But the most important reason for today's rise in rates was the light market participation. Imagine there are 30 traders making big bets in the bond market. Chances are good that some sort of balance will emerge with that many potential buyers and sellers. At the very least, it's conceivable that 15 traders could be on either side of the bet. Now imagine there are only 3 traders. There's no way for that NOT to be lopsided, and make for a consequently outsized move in one direction or the other.
While these numbers in no way represent the actual numbers of market participants, the dynamic is the same when participation decreases. Movement is exaggerated. To make matters worse, algorithmic trading programs have a more prominent role on weeks like this (humans leave, robots stay) and their primary function is to jump on trends in motion. In other words, an algorithm could be programmed to sell bonds if it looks like a big selling spree is happening based on a certain level being reached. That selling in turn pushes rates higher still, potentially hitting the target level for another algorithmic trading program. It doesn't take long for snowballs to form in such conditions, and that's exactly what happened today.
3.875% is just about out of the picture at this point, with 4.0% being the afternoon's most prevalently-quoted conforming 30yr fixed loan by a small margin. That said, many borrowers may still find the costs associated with buying the rate down to 3.875% attractive.
Loan Originator Perspective
"It seems to me that mortgage pricing has bounced around in a fairly tight range for the past month varying little more than .125% during that time. We received a large upward revision to 3rd Quarter GDP #'s this morning suggesting a faster growing economy but other recent data has not necessarily given us strong confirmation. We know the Fed is moving towards normalizing interest rates sometime after mid 2015 but in a backdrop of a global economic weakness driving foreign interest rates ever lower US Treasury Securities remain very attractive which should temper any rise in rates. Still, a lot of uncertainly out there, however, and longer term the trend will be up, so closings within 15 days should be locked and beyond that lock decisions driven by your risk tolerance." -Hugh W. Page, Mortgage Banker, Seacoast Bank
"Rate rose today in pre-holiday trading. The increase isn't particularly significant, given the large number of traders absent, but it was enough for 14 lenders to worsen pricing by 2:30 EST. Tomorrow there will be fewer parties involved, so any moves may be exaggerated by low volume. Happy with your pricing? Could do far worse than locking, particularly if you're closing within 30 days. Merry Christmas/Happy Holidays to all!" -Ted Rood, Senior Loan Originator, MB Financial Bank
"Today was simply a bad day for bonds. This morning we had a great GDP number which helped fuel stocks and take some air out of bonds. The afternoon brought a bad treasury auction which increased the selling of bonds. While the thin holiday trading could lead to large market swings it is safe to say things did not go in our direction today. It is possible to see a continued slide heading into the new year so locking in may be the safe thing to do. If you are a risk taker you could wait until tomorrow in hopes of a bounce back and hopefully better pricing but that decision does carry risk." -Manny Gomes, Branch Manager Norcom Mortgage
Today's Best-Execution Rates
- 30YR FIXED - 3.875
- FHA/VA - 3.25
- 15 YEAR FIXED - 3.125
- 5 YEAR ARMS - 3.0 - 3.50% depending on the lender
Ongoing Lock/Float Considerations
- The hallmark of 2014 has been a narrow range in rates. Too many market participants bet on rates going higher in 2014, and markets punished that imbalance with a paradoxical move lower. This continues to serve as a reminder that prevailing beliefs about where rates will go won't necessarily be correct simply because they're the most prevalent.
- European bond yields have trended constantly lower in 2014, thus playing a prominent role in keeping US rates lower than they otherwise might be. Many feel that Europe will continue to slide until their central bank engages in US-style quantitative easing. Some see this happening in early 2015. In any event, we're looking for a turn in Europe, first and foremost, before worrying about the longer-term trend in bond markets being at serious risk of reversing.
- Much of 2014 could be considered "sideways to slightly lower" in terms of mortgage rates. All things considered, it actually has been a remarkably gentle drift lower. Things became less gentle in mid October when rates briefly broke into the high 3's. They came back for a more gradual, determined push into the 3's in December. Some of the late-year strength is being chalked up to an epic slump in oil prices. This drags inflation expectations lower, which is a net-positive for interest rates.
- As always, please keep in mind that the rates discussed generally refer to what we've termed 'best-execution' (that is, the most frequently quoted, conforming, 30yr fixed rate for top tier borrowers, based not only on the outright price, but also 'bang-for-the-buck.' Generally speaking, our best-execution rate tends to connote no origination or discount points--though this can vary--and tends to predict Freddie Mac's weekly survey with high accuracy. It's safe to assume that our best-ex rate is the more timely and accurate of the two due to Freddie's once-a-week polling method).