Tuesday 6/10/08 ..... Completely Hammered!

Mortgage rates that is!  The scheduled economic releases today were few and uneventful, but inflation drove the bond market into a panic.

The Why:

Remember that mortgage rates are dictated directly by the trading of Mortgage Backed Securities, which are essentially bonds. If I lend, via a bond, $100 today, and inflation causes my present day $100 to only purchase the present day's $70 worth of goods in 5 years, my $100 is really only worth $70 when you factor in inflation.  because of this phenomenon, inflation is deadly for the bond market, of which Mortgage Backed Securities are a part.  The higher the inflation concern, the higher the yield that investors demand in order to have the bond make sense to them from a financial perspective.  And yes, you guessed it!  When investors demand higher yields before buying, your mortgage rates go up!  And they went up, up, and away today.  This was the worst day in a few weeks.

To Lock or Float?

This should be at moot point considering the strong lock recommendation from yesterday, but if you are not locked yet, you'll have to wait in the same cold, dark, room as everyone else who didn't lock and see what the market is doing tomorrow.  Our saving grace could be a tame Consumer Price Index report on Friday (it's a key inflation gauge).  Conversely, if the CPI is bad, we could spiral out of control.  Definitely lock by thursday night if you can't afford to take the risk. 

The Numbers:

 To put things in perspective though, when I talk about rates increasing dramatically, that usually amounts to .25% in one day. The best rates available today on a 30 year fixed are still in the low 6's, so it's not the end of the world yet.

The News:

• Trade Deficit
• This is usually not an important report for the bond market.  Today is no exception.  What really threw the markets for a loop was Bernanke speaking both last night and today (as well as other members of the Fed).
• Long Story Short: We're all supposed to be afraid of the inflation Boogie-Man who is lurking under our financial beds.
  

Conclusion:

Now we're in an area with respect to mortgage pricing where we may have a slight rebound here in the next few days (even tomorrow).  This happens independently of market data at times, and can be contributed to by forces as simple as traders "feeling" the price on mortgages has come too low, too fast, so they're going to buy (which brings rates down), even if they are just going to sell soon thereafter (which brings rates back up).  Its like most curves when it comes to economics: even the ones that are heading in one firm direction still have a bumpy ride along the way.  But I can't emphasize enough how quickly things can change a) in this current economic climate and b) when rates have risen extremely rapidly to their average level for the previous 12 months (roughly).  This leaves as little resistance possible to going in either direction.  Once momentum builds, that's that as far as rate increases.  So again, locking is your secret weapon against a volatile market.  Even if rates dropped, if you lock when you know you can afford your payment, you remove the risk of the loan being unexecutable.