Mortgage rates extended their recent rally yesterday as stocks slide and investors continued to flock to risk averse assets like U.S. government guaranteed Treasury debt. Much like Tuesday, it was an "up and down" day in financial markets.  Mortgage rates were initially indicated higher at the beginning of the day but that didn't last long and mortgage-backed security prices ended up closing at their highest levels of 2010. Several reprices were reported during the most volatile hours of the trading session. Mortgage rates ended the day priced near their most aggressive levels of the year. READ MORE

There is no economic data scheduled to be released tomorrow, so today is the last day of the week for market participants to digest economic news. 

First to be released were Weekly Jobless Claims. This report provides three measures of 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 low.  

From the MBS Commentary Blog...

Jobless Claims:  +25,000 to 471,000 vs. 440,000 forecast  vs. previous 446,000 (revised from 444,000) WORSE THAN EXPECTED
Continued Claims:  -40,000 to 4.625mln vs. 4.60mln forecast vs. previous 4.665mln (revised from 4.627mln) WORSE THAN EXPECTED
Extended Benefits: +21,419 to 240,260 vs. prior 218,841
Emergency Unemployment Claims: -94,788 to 5,101,246 vs. prior 5,196,034

Next came the release of April Leading Indicators.  This is a composite index of 10 economic releases that are believed to be forward looking indicators of  business activity.  If the month over month change is positive, it indicates the economy is improving.  Most of the components of this report have already been released so the market generally has a limited reaction to the news. Today’s data indicated Leading Indicators fell by 0.1%. This was slightly worse than economist forecasts which called for a 0.2% rise in April and the first month over month decline since March 2009.

The final report of the week was the Philadelphia Federal Reserve's Business Conditions Survey.  This survey gives market participants a measure of the strength of factories in the Philadelphia region.  Readings above 0 indicate conditions are improving while readings below 0 indicate business activity is contracting.    Recent readings have shown manufacturing in this region to be consistently improving, this continued in May as the business activity index rose to 21.4 from 20.2 in April.

The Department of Treasury announced the terms of next week's round of Treasury auctions. When our government does not have enough cash to pay their debts, they borrow funds in the debt market by issuing Treasury bills, notes, and bonds.  The added supply of debt on the market can pressure yields and mortgage rates higher, however the effects of a shift in supply and demand have been muted recently by investor concerns regarding the ongoing European debt crisis. To be more clear, a "flight to safety” has helped ease the pressure of new debt supply in the market.   The Treasury Department announced they will sell $42billion 2 year notes next Tuesday, $40 billion 5 year notes next Wednesday, and $31 billion 7 year notes next Thursday. These offering amounts were expected.

The flight to safety continued today as stocks moved lower around the world. This sent benchmark Treasuries to their lowest yields of the year and helped mortgage-backed security prices tick higher. Mortgage rates improved once again thanks to the "flight to safety".

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.

Reports from fellow mortgage professionals indicate lenders passed along lower consumer borrowing costs. The par 30 year conventional rate mortgage is now in the 4.625% to 4.875% 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 closing costs but will have to accept a higher interest rate.   A no cost loan is in the 5.375% to 5.5% range. 

We are seeing the best rate sheets of 2010 today and I continue to favor locking.  As I have stated many times, it is better to have locked when you should have floated than it is to have floated when you should have locked.   If you wish to float in hopes of an extension of the rate rally, keep an eye on stocks.  If stocks move lower, mortgage rates will inch down. If stocks rally, mortgage rates will move up rapidly. This is risky and you do not have much to gain as rates are almost back to the record lows seen last year. READ MORE ABOUT WHY WE FAVOR LOCKING AT THESE LEVELS