Rate sheet influential MBS have been jolted from their recent range by higher stock indices and a rise in benchmark yields. The S&P is at an intraday high of 897 and the benchmark 10 yr TSY note yield has risen to 3.34%. Consequently, the FN 4.5 has fallen to 100-10 from 100-17, which would be enough reason for lenders to reprice for the worse. MBS/TSY spreads have however tightened a fews bps as TSYs yields rise...indicating some MBS resistance towards a rise in benchmark rates.
I usually dont comment on loan by loan locking strategies, however in MBS LUNCH I gave an outlook. Here it is:
LOCK OR FLOAT?
I would always be locking in deals...but that is from a pipeline manager's perspective. The question should be...how many loans would I NOT be locking?
From a loan by loan point of view you have to look at where rates are right now vs. where they were when you started this process. If you set a goal and you have met it...you should lock because you achieved your objective. If you set a goal and havent met it yet, well there is still enough potential for rates to fall further as stocks and bonds have both been testing/retesting very key technical levels....usually when this occurs...those levels are eventually broken.The question then becomes what to do in the short run vs. the long run? When will bond yields fall again?
In the short run: Stocks are somewhat oversold and bonds are a bit overbought, therefore a short term correction in both market is to be expected. Influencing this outlook is the notion that bank earnings will be boosted by trading revenues (arbitraging record low short term borrowing costs). That said we may see a bounce in stocks after earnings reports are released...which will likely be preceded by profit taking in TSYs.
In the long term: expectation for slow/stagnate economic growth (weak housing, commericial real estate, labor market) should moderate stock market optimism. So even if stocks bounce in the short term, the support(stocks) and resistance (bonds) levels we have been testing over the past two weeks will eventually be broken as the market refocuses on the big picture outlook again.....this reality should keep demand for TSYs high heading into year end.
At the moment, in the short term, there is some room for mortgage rates to withstand marginally losses in the MBS and TSY market, however MBS and mortgage rates can only withstand so much when it comes to short term selling. Furthermore, there is more to generating mortgage rates than the movements in MBS markets. Lenders still face considerable funding issues, so once pipelines are filled and operations staff are busy...mortgage rates will likely weaken relative to MBS prices (wider primary/secondary spreads)....rallying yield curve or not!!!
In the short term I would be taking profits....I would be locking more loans than floating. Long term, I think mortgage rates will creep back in the 4-5% range.
2s vs. 5s: 135bps
2s vs. 10s: 244bps
5s vs. 10s: 109bps
OIL: NOT OVER $60!
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