1/24/08 - Ouch

It was hard to miss the sharp rebound in stocks yesterday.  Coupled with some potentially reassuring news for bond insurers, this led to a ridiculously huge sell off in bonds.  Rates took a beating of a full discount point in some cases.

This is the technical "rubber band" we discuss from time to time.  The market had come so far so fast that the positive news it received had a much more negative impact on bonds than it otherwise would.  

It looks like the bond sellers didn't get their fill yesterday at prices continue to slide.  Even though, in news, jobless claims came in better than expected, the markets movements at this point are highly susceptible to emotion as opposed to cold logic.  These emotions such as fear or hope, are highly inflammatory agents that exacerbate the normal effects of economic data and policy decisions.  As such, expect continued volatility in any market that has had drastic and rapid movement.  There will come a point where it "settles down," but no one knows when that might be.

As we can see from yesterday, the importance of government intervention can never be underestimated.  It is one of the dark horses we have referred to previously that can help the economy, which, in general and especially right now, is bad news for mortgage rates.

Regardless of bailouts, no one action can change our recessionary trend.  If volume in stocks is high today AND we have a large move upwards, this is historically a signal for some continued strength.  If this occurs, locking may be wise if your loans are closing short term.

I remain bearish until further notice and view yesterday (and today probably), as a "dead cat bounce."  Its not a matter of "if," but of "when" as to 30 year fixed PAR rates settling under or around 5.0% for quite some time.  If things get as bad as we think they will, rates could achieve all time lows.

But in the short term, market strength, a warm reception of the impending economic stimulus package, confirmation of yesterdays proposed bond insurer bailout, high volume in stocks that coincides with gains, and other economic data could mean we will not approach yesterday morning's rates for 1-3 weeks.  So as previously mentioned, if these things occur, short term locking may be advised.  If your outlook is longer, floating may pay off.

At any rate (no pun intended), you must keep an eye on the market.  Remember that high volume in stocks, coupled with gains means its safer to lock.  If you are a cynic on economic rebound potential, float away!  The important thing is that you watch stocks and the 10 year note.  Although not as accurate as MBS's for an idea of mortgage rates, they can give you clues about rate movement.  But keep an eye on this blog for MBS price data.  As far as this morning, you don't want to know!

It's moving wildly, but at time of this posting the 5.0% coupon was at 99-16/32nds.  Ouch Indeed!