May 30, 2014
Mortgage rates continued slightly higher today. This had more to do with a market-based continuation of yesterday's momentum than it did with any of today's data and events. Lenders' rate sheets are most directly affected by trading of Mortgage-Backed-Securities (MBS), which are part of the broader "Fixed-Income" or simply "bond markets."
Trading in bond markets has recently grown more exciting than it had been from February through April. As May draws to a close, we can look back and see more clearly that much of the positivity was (and still is) a factor of expectations for the European Central Bank (ECB) to embark on some sort of asset buying program, similar to the Fed's QE. The ECB is also expected to cut its policy rates.
That's the sort of big-picture development that global bond markets have a hard time ignoring. If one, small, individual nation were considering such a thing, no big deal. But the EU, collectively, is massive, and the trends in European bond markets have a clear and consistent effect on US bond markets.
Right now, the expectation for this stimulative move has made it very unfashionable for the likely beneficiaries to act as if they won't benefit. More simply, the safest European debt along with US Treasuries would certainly benefit from the potential policy announcement (meaning rates would fall). Because markets are reasonably sure at least some of the potential changes are coming, they're already out ahead of them (meaning that rates have fallen in anticipation of having reason to fall next week).
In short, this anticipation is what has kept the lid on any major correction toward higher rates over the past two months. Indeed, that's been a frequent point made in this daily commentary. There is another factor however, and it's one I talk about much less because it's an even more abstruse concept than all this Central Bank business. It has to do with the sorts of bets that traders are making on the direction of interest rates.
To simplify this point greatly, there was a lopsided consensus for rates moving higher into 2014. Of course rates didn't move higher and those traders were forced to make offsetting bets for rates to move lower. But the same dynamic has repeated itself on several occasions! Traders bet on higher rates, markets punish them, they get neutral, and then go right back to betting on higher rates again!
The reason I bring all this up today is that we're FINALLY starting to see those bets among traders reach more of an equilibrium. Combine that with the fact that markets are already pricing in expectations of something fairly impressive from the European Central Bank next week, and the risk for a more serious reversal is as big as it has been recently. Please understand, this is not a prediction for rates to move in either direction, simply a warning that one of the potential scenarios is for quicker movement to higher rates.
For now, however, rates remain very close to the best levels in nearly a year, with only The past two days offering anything better. The most prevalently quoted conforming 30yr fixed rate for best-case scenarios (best-execution) remains at least as low as 4.125%, with some lenders closer to 4.0%. Many borrowers will see today's weakness in the form of higher closing costs vs yesterday. Expressed in terms of effective interest rates, the increase equates to 0.03%.
Loan Originator Perspective
"Much of the rally from this week was wiped away with the losses from yesterday. Of course, lenders have taken away much more than the price drop justifies, but that is to be expected. This morning it looked like the losses would continue but MBS has managed to rally off the lows. With today being Friday, I would think most lenders will probably hold back on passing along any gains unless we strongly rally into close. All that said, I think floating over the weekend is the way to go. Lets see how rate sheets look on Monday morning." -Victor Burek, Open Mortgage
"Recent rate improvements took a breather today. No telling if this is a trend yet but next week sets up as a “high risk” week with the rate decisions from the ECB, and the all important Jobs Report on Friday. If you seriously evaluate the Risk / Reward tradeoff for mortgage rates into next week you probably would look at locking in your interest rate now and especially if you are on a short time frame to closing. Floating is a little risky right now in my opinion." -Hugh W. Page, Sen. Mortgage Consultant, Capital Partners Mortgage
Today's Best-Execution Rates
- 30YR FIXED - 4.125%
- FHA/VA - 3.75%
- 15 YEAR FIXED - 3.25%
- 5 YEAR ARMS - 3.0-3.50% depending on the lender
Ongoing Lock/Float Considerations
- The Fed has stayed the course on their $10bln per meeting reduction in bond buying, though markets have handled it relatively calmly compared to the days of "coming to terms with tapering" in 2013.
- Rates fell significantly in January, leveled-off in February and took choppy steps higher in March. From there, they settled into a flat range mostly consisting of 4.375 and 4.5%, but with occasional forays to 4.25 and 4.625%.
- While the bias had been very slightly toward higher rates, it reversed course in April and rates returned to the lower end of the range by May 1st. As the "weather effects" fall out of the spotlight, market participants are seeing a bit more organic weakness in the economy than they'd expected.
- Earlier in May, the focus looked to be returning to economic data, but that proved short-lived as prospects for European central bank easing overwhelmed some of the incoming data, pushing rates lower while data suggested a move higher.
- As of the third week in May, rates were as low as they've been since June 2013, more than confirming a break below the 2014 range.
- Looking back at recent movement, it's had a disconcertingly small amount to do with 'normal stuff' like economic data and Fed policy. Temporary and unpredictable factors currently account for too much of the movement to make firm bets on rates moving either direction in the short term.
- (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).