I know many of you are probably sitting on a few loans trying to decide if you should float into the 15 day window in hopes of another rally and better execution on a shorter commit. period or lock up what you got now.
In these scenarios, when the market has set itself up to be able to trade in any direction it wishes, we should take a look back and re-evaluate our strategy.
The preferred tactic: PLAY THE RANGE UNTIL THE RANGE PLAYS YOU
Stocks have been the primary source of directional guidance for interest rates over the past 40 days. Stocks sold off for the entire month of May and benchmark interest rates plummeted, pulling mortgage rates to levels not seen since the record lows of 2009. More recently risk has been back in style and we've started to question whether or not the latest movement of market prices are tied to a broad shift in the sentiment or a short term correction.
"Sell in May and Go Away, Buy In June and Watch Values Bloom"? Or "buy the rumor, sell the news" ?
Basically, after a month of mortgage rate rallying, both stocks and bonds are showing signs of a longer term trend reversal...and float boaters are getting motion sickness from all the mixed signals. No one want to be the hog who got slaughtered. And slaughtered you would get if you floated and 10s rose all the way up to 3.50%.
Par 30 year fixed conventional loans still pay rebate at 4.625%. Since it's all relative, I should just say mortgage rates are not much higher than they were last week. I could also say, even though benchmark yields made a violent move higher this week, loan pricing was stable at aggressive levels. Plus, I' m not sure if you've noticed but lenders have been letting more and more air out of the cushion in their rate sheets lately.
If you want my bias as to what direction the markets are going to head in the next 24 to 48 hours, that is a total guessing game, but I don't think it heads far either way, not unless NFP is much worse than expected. In that event stocks would sell and MBS would rally. Other than that I feel stocks have limited upside potential...an outlook I share on any potential interest rate rally too.
Don't confuse "limited upside potential" with "I am bearish on stocks". We've all been run over a few times this year by the relentless powers of the stock rally frieght train. With that in mind, I don't doubt for one second that S&Ps could carry upward momentum through June, I just don't feel current economic fundamentals warrant the S&P valued above 1200. If stocks rally on, 10s will likely move toward a test of 3.50% and the mortgage rates you are being offered today will vanish before your eyes.
On the other hand, if interest rates rally, I find it hard to believe 10s will fall much lower than 3.20%. And given the fact that MBS were presented the perfect environment to fend off a back up in benchmark yields this week, mortgages don't to have much room left to keep up with a benchmark rates rally. You can bet your a$$ that the recent yield spread tightener would unwind itself in a hurry and mortgage rates would greatly lag any TSYs rally. If you are a supporter of my "10s won't close below 3.20%" theory..then it's easy to see that MBS prices and mortgage rates have much more room to rise than they do to fall.
It's a classic case of "slow to improve fast to remove."
My point: If you are "PLAYING THE MORTGAGE RATE RANGE" along with me---we are still at the bullish end of the spectrum. In the short term, which is the timeline many of you are on, the RISKS OF FLOATING GREATLY OUTWEIGH THE REWARDS OF NOT BEING THE HOG WHO GOT SLAUGHTERED. This is the safe move, but I would be locking 95% of my loans even if they're 45 days out.
By the way if you're looking for a reason to believe the payrolls number will be worse than expected, here is one: Jobless Claims rose 25,000 in the NFP survey week. READ MORE
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