14 Jan Don’t pass up an opportunity
The bond market is in rally mode this morning after the European Court of Justice announced their decision to approve OMT’s (Outright Monetary Transactions), which is the equivalent of the EU’s Quantitative Easing. This sets the stage for continued weakness in in the Euro, which will help make the US dollar more attractive. When European investors are considering where to place their money, if they compare the German Bund (the German equivalent to the US 10 Year Treasury Note) against the 10 YTN, they earn nearly 4Xs the return in the US. In addition, if the dollar continues to strengthen they will also earn a rate of return from the currency exchange. This dynamic is causing massive amounts of money to flow into the US bond market which is driving mortgage interest rates lower.
Mortgage application data was released this morning. Purchase applications were up a whopping 24%! This is a combination of coming out of the holidays along with low mortgage interest rates. We have been saying for the past 20 months that our housing market is not prepared for higher mortgage interest rates. The weakness in the housing market since rates pushed higher in May of 2013 is evidence to support our belief. The current drop in mortgage interest rates provided potential homebuyers an opportunity to purchase a new home at an amazing interest rate. However, there is no way to know for sure how long this opportunity will be available.
The gain in mortgage bond pricing has been at an unsustainable rate. At some point bonds will need to take a breather. They are now at the top of a trading range and sitting right beneath resistance. With rates at low as they are now, it would be difficult to pass up on the current opportunity. If bonds are able to break above current resistance we feel there is more gains to be made in the bond market. That would drive interest rates lower. However, there is no certainty that will happen.