Mortgage rates inched lower yesterday as global investors continued to flock to risk free U.S. Treasury debt securities. This has been a constant theme in the rates market recently. However, while benchmark Treasury yields have moved considerably lower in a short time, mortgage rates have failed to keep pace with the "flight to safety" rally.  

A flight to safety happens when investors are nervous about owning risky assets like stocks, but do not want to miss out on earning a return on their funds, so they allocate money into risk-free U.S Treasury debt to provide a safe-haven AND an investment return. To remind readers, as benchmark Treasury yields fall, prices of mortgage-backed securities move higher, which allows lenders to offer lower mortgage rates. As Treasury yields rise, mortgage-backed security prices are led lower, which forces lenders to push mortgage rates higher.

Before we discuss what unfolded in financial markets this afternoon, we have some economics data to discuss.

This morning the Department of Labor released weekly Jobless Claims.   This data provides three measures on the health of the labor market:  

1. Initial Jobless Claims:  totals the number of Americans who filed for first time unemployment benefits
2. Continued Claims:  totals the number of Americans who continue to file for benefits due to an inability to find a new job
3. Extended and Emergency Benefits: totals the number of Americans who have exhausted their traditional benefits and are now receiving extended and emergency benefits

Since our economy is driven by consumer spending, economists track employment data to get a sense of future economic momentum.  Higher jobless claims lead to less consumer spending, which is bad for the overall economy but generally helpful in keeping mortgage rates from rising. 

The report showed, in the week ending May 1, initial jobless claims fell by 7,000 to 444,000. This was in-line with expectations. Continued claims were 59,000 lower at 4.59 million, which was also in-line with expectations.   The number of Americans who are collecting Extended and Emergency Benefits rose 153,0786 to 5.56 million...once again reminding us that most jobless Americans have been out of work for over 27 weeks.

Released at the same time was the Productivity and Costs Report for the first quarter of this year.  This data measures how efficient our work force is at producing our nation’s goods and services.  A more productive work force means employers do not need to hire additional staff to increase production, while unit labor costs measures the labor cost of producing each unit of output.   Higher productivity lowers the unit cost of producing goods which helps to keep inflation in check. 

The release indicated productivity improved more than expected at a 3.6% rate. Unit labor costs declined more than expected by 1.6%.  Higher productivity should help increase corporate profits which benefits the stock market while lower labor costs benefits bonds as it keeps inflationary pressures in check.   In times of high unemployment, people tend to work harder for fear of losing their job which can be seen in the productivity numbers.   Additionally, as workers are more productive employers have less need to hire additional staff which has negative effects on hiring in the future.  This isn’t great news for those without a job.  For more on how Labor Costs and Productivity affect mortgage rates, check out AQ's opening commentary HERE

Now for the fun part...

Economic data was not the driving force behind mortgage rate improvements today. The biggest single day point drop in the history of the Dow Jones Industrial Average was the primary source of motivation in the interest rate market today.  Yes you heard that right. At one point the Dow was down nearly 1,000 points! This led to a massive flight to safety and higher mortgage-backed security prices. The media is reporting the sell-off took off as a result of a trader error, either way weakness in stocks and global economic fears allowed lenders to reprice for the better and lower mortgage rates today.

Reports from fellow mortgage professionals indicate lender rate sheets to be improved from yesterday. The par 30 year conventional rate mortgage has fallen into the 4.75% to 5.00% range for well qualified consumers.  To secure a par interest rate on a conventional mortgage you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including an estimated one point loan origination/discount/broker fee.  You may elect to pay less in fees, but you will have to accept a higher interest rate. 

Tomorrow is the release of the official Employment Situation Report.  Economists are expecting 200,000 jobs to have been created last month and the unemployment rate to be unchanged at 9.7%.  This report usually has a large impact on the markets but with today's stock sell-off, jobs data may not have as big an impact.

Mortgage rates are now back to their lowest levels of 2010. While stocks could continue to fall in the days ahead, lenders have proven they are unwilling to push mortgage much lower than current levels.

If you did not read it yesterday, AQ wrote a recap of the fundamental factors currently influencing interest rates. It is a must read, especially after what happened today. READ IT