Still More Risk than Reward in Floating

Mortgage rates fell a few basis points yesterday as prices of mortgage backed securities traded near the top of the current range.  Helping benchmark yields and MBS prices improve was a weaker than expected read on the housing market and tame inflation data.   At the open of trading this morning, MBS have given back all of yesterday’s gains as traders consolidate profits and re-evaluate the market's bias. 

I speak often of range bound trading. This concept was explained yesterday on the MBS Commentary blog. Check it out. 

We received more information on the housing sector this morning with the release of the weekly Mortgage Bankers’ Association Application Index.  Today's report shows that the recovery progress in the housing market took another turn for the worse last week. Weekly purchase applications fell 7.6% while refinance activity dropped a whopping 16.7%  This is the second week in a row of declining applications, hinting that demand for housing may be deteriorating as the expiration of the First Time Home Buyer tax credit draws nearer.   On Friday we get another look at housing data with the release of Existing Home sales. 

At 2:00pm the Federal Reserve will release the Beige Book.  The Beige Book reports on economic conditions across the country.   The information contained within this release is already known so it generally does not have a big effect on the markets.  However, since this report is used at the FOMC meetings investors will still review it thoroughly for inconsistencies. 

At 3:45pm eastern, Richmond Federal Reserve Bank President Jeffrey Lacker will speak to reporters following a journalism workshop. A little later Boston Federal Reserve Bank President Eric Rosengren opens a conference in Massachusetts with a prepared speech.   Anytime Fed officials and voting members of the FOMC speak, market participants listen for their view on the economy which might give them a hint on future monetary policy decisions. 

Reports from fellow mortgage professionals indicate lender rate sheets are slightly worse today.  The conventional 30 year fixed par  mortgage rate remains in the 4.75% to 5.00% range for well qualified consumers.  To secure a par interest rate you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs with an estimated one point loan origination/discount/broker fee.   If you are seeking a 15 year term, you should expect a par interest rate between 4.25% to 4.50% with similar costs. 

The data calendar picks up tomorrow with the release of weekly Jobless Claims, Leading Indicators report and Treasury announcement of the size of the upcoming offering of debt.  All of these reports have not been friendly to MBS of late, so floating remains risky.   Currently, MBS are in the middle of the recent trading range and the reports tomorrow could easily pressure prices fall which would increase mortgage rates.  Because rates are not far from recent five month lows,  there is more to lose from floating than to gain, so I am still advising my clients to lock in their rates.