At 12:30 PST today, The the DOW was down over 140 points on the day, yet bond prices remained relatively unchanged.
Traders are obviously concerned about inflation. This is really the key for any prediction of mid to long term rate changes. As always, no one can say for sure if inflation concerns will increase or diminish. Different analysts interpret economic reports and statistics in different ways. These interpretations are the source of their inflation predictions.
I have been saying for the past several weeks that "I am bearish on the economy." Unfortunately, a weakening economy, in and of itself, is not always enough to move bond prices up (which makes rates better). Foreign money, unexpected intervention, potential employment growth, and other factors could temper my bearishness. Even more important is inflation. As long as it is a concern, it will keep bond prices in check, and if inflation data is bad enough, rates can even go higher despite economic contraction.
After reviewing data today, listening to reports from the bond pit, etc..., I am beginning to get the feeling that there is an increasing chance of hyper-vigilance regarding inflation. Among the causes noted are increasing import prices from China, increased expense of outsourced labor, a weak dollar (even if the bottom is behind us), oil/energy prices. These economic factors feed the fear of the inflation boogie man.
The source of the hyper-vigilance problem that I feel on the horizon is threefold, as it relates to the bond market. First, bond prices are relatively high in terms of their trading range with only limited occurrences of higher prices in the past. Second, Mortgage-Backed-Securities (MBS's) are devalued compared to other bonds due to problems in the mortgage market. To support this, just look at the last time the 10 year note traded around 4.0% yield. MBS yields were around 0.5% less than they are now. This means that, compared to the past, investors are buying the 10 year note more and the MBS less. When investors buy the MBS less, rates go up as sellers lower prices to entice. Third and finally, negative inflation data and analysis seems to gain momentum quickly. If the FED continues to cut rates, it will actually hurt the mortgage market by igniting the "gathering cloud of fuel" that is the current inflation perception.
As far as locking your mortgages, I see a lot of uncertainty and potential volatility in the market in the upcoming weeks and months. If the rate fits your goals, I would lock. The economic reports and media will be watched closely. Any more relatively strong indications of rising inflation will add momentum to the concern. Unless we get some very inflation-friendly data in the near term, traders will resist testing the upper limits of bond prices, and mortgage rates will either stay where they are, or go higher.
This particular period in economic history seems to confuse investors and traders. One gets the feeling that the market doesn't really know exactly how it wants to react to certain events. Several factors of the economy such as housing, oil/energy, liquidity, credit, financials, the dollar, and others are changing at a historically extreme pace. This is a recipe for volatility.
To conclude: be careful with your larger loan amounts. Lock them if the rate meets your goals. Despite a potentially weakening economy, don't expect rate cuts if the inflation boogie man remains at large. I still believe that the elimination of home equity and easy credit will have a greater-than-expected impact on our economy. So for now, I hold the hope that rates will be lower in 2008. Nevertheless, I'm "concerned about possibly increasing concern" over inflation. In the short term, be safe and stay tuned.