We have had a great run this week despite positive news on the economy (recall that POSITIVE news is generally NEGATIVE for mortgage rates). It seems investors are paying more attention to tame inflation talk from the feds then the positive reports are our economy. And as we frequently discuss, inflation is a mortal enemy of Mortgage Backed Securities (MBS). The GDP report was released this morning showing 2nd quarter economic growth of 3.3% where economists where expecting 2.7%. Historically, good news such as this would cause money to flow out of the debt markets (treasuries and bonds) and into equity markets (stocks). However, we are seeing MBS hold their own today despite this positive news. One reason for this might be that the strong economic reports are backwards looking but investors are looking forward.
Spreads between treasuries and MBS continue to remain at historically wide levels (meaning that investors view MBS as a more risky investment, so they command higher rates, which end up getting passed on to consumers. So if spreads were to tighten, and everything else remained the same, rates would come down). As of this week, spreads are tightening. In this volatile market, this is no guarantee of a continued pattern, but it's a step in a positive direction. This gives us a good opportunity to discuss the pitfalls of the common misconception that treasury pricing affects mortgage rates. At this very moment, the 10 year treasury is down in price (up in rate) a quarter of a point today, whereas mortgages are dead even from yesterday. So someone watching the 10 year treasury would potentially be led into a premature lock decision. Spreads vary for numerous reasons, but in general, the longer we go without what's known as "headline risk," the better. Headline risk refers to unscheduled announcments that affect investor sentiment of MBS versus treasuries.
There is reason to believe that July marked the bottom for mortgage rates, meaning MBS were at the highs of the year (Remember Price up = Yield up). Historically rates have been more likely to peak in the summer months than in any other time of year. Technical and Fundamental analysis of the market suggests this could be the case this year as well, especially if inflation stays in check, and we avoid major bank failures. On that note, it was comforting to see that no major financial company involved in the MBS market was included in the FDIC's "problem" list released this week.
The main question, "should I lock today or float the rate into the unknown?". If you have a short time horizon for closing, locking today may make sense. We have had 4 winning days in a row and at some point you got to pull your money off the table and walk away with the profits. However, if your risk tolerance is high and you have several weeks before closing, and you believe the economy will continue to struggle, floating could make sense.
It's not perennially adviseable to "play the markets," especially when we are at the best point for rates in roughly a two month period. However, if you are aggressive and can diligently monitor and digest our "professional" blog (linked at the top of the page), you might be able to eke out additional gains. Just remember, if rates go up, you'll generally regret floating when you should have locked, more than locking when you should have floated.