TUESDAY MORNING .............................................. 2/12/08
The stock market is booming currently and the bond market is suffering. As we discussed yesterday, the scheduled economic data this week would be light, and that market direction would be more susceptible to news headlines. In addition, we talked about how this week could be more volatile. With the DOW up 200 points currently, and nary a mention of the economic reports today, we are certainly seeing evidence of volatility owing to news headlines.
The biggest news is Warren Buffet's announcement that he is offering up to 800 billion dollars to back ailing bond insurers. You'd think that this would be good for mortgage rates. If more bonds will be insured, then they would be more valuable. If they're more valuable, you'd think that prices would rise, thus lowering rates. In fact, quite the opposite has happened the last two times the potential for a bond insurer bailout has been discussed. This is because, although proposals like these do, in fact, make bonds more appealing, the biggest impact of strong bond insurance is an increased level of certainty regarding corporate profits. And when there is reassurance about corporate profits, stocks go up. That money has to come from somewhere and it usually comes from bonds. In addition, Buffet's plan would not guarantee CDO's (Collateralized Debt Obligations--basically the general category that Mortgage Backed Securities fall into).
Combined with some other headlines from yesterday, including a comment by a FED president that inflation was a concern and we should avoid a recession, stocks are way up, and bonds are way down.
This will lead to drastically WORSE mortgage rates this morning. We are already worse by 0.5% discount point, meaning that a given interest rate today will cost you .5% more than it did yesterday.
As far as the decision to lock or float, it can go either way. If you keep a diligent eye on the markets today, watching for any continued strength in stocks, you may be OK to float through the day. But be warned that floating when rates are rising always carries a risk. On the other side of the coin, many lenders will wait for the market to hit bottom this morning before sending out rates. By that time, the bond market could be poised for a rally if the lemmings decide to head the other direction. So if your lender has already released rates this morning, locking is the safe bet. If your lender is waiting another hour or two to release rates, assess stock strength at that time, check back in on this blog, and float with extreme caution with lock requests at the ready.
On a broader scale, I remain bearish on the market in general. Despite negative spikes in mortgage rates like today, I think that the consumer spending problem will continue to drag the market down. Perhaps we will get some strong evidence to either support or refute this on Wednesday when the Retail Sales Report comes out. Inflation remains the enemy, and there are some reports this week that will address that issue as well. Stay tuned, and if you haven't locked already, be ready to!