05 Jun If you choose to float, you may get burned
As anticipated in yesterday’s update, the market’s expectations were well below reality when projecting job growth for the month of May. While the
consensus was for only 210,000 new jobs, the Bureau of Labor Statistics report showed that 280,000 new jobs were created. This caused panic in
the market, forcing mortgage interest rate pricing even higher. One of the primary contributing forces to the adverse market reaction was that
wages increased by 0.3% last month. This was hotter than expected and is viewed as an early indicator of inflation in the marketplace.
Typically, wages moving higher leads to higher prices for goods and services. Since inflation is the arch enemy of mortgage bonds, bond holders
demand higher returns as inflation moves higher.
The deterioration in the market has led to one of the sharpest increases in mortgage rates that we have seen in a while. This leads to the larger
question of where do mortgage rates go from here? Well, for nearly two years mortgage bonds have been in a very long term upward channel.
This has led to a slow improvement in mortgage rates that bottomed out in early May of 2015. However, it appears that we are in the beginning
stages of a long term trend reversal. A look at the past three months of the bond charts shows a clear formation of a downward channel that broke
mortgage bonds out of the upward channel they enjoyed for many months. If this channel holds, we can expect bonds to slowly deteriorate and for
rates to grind higher. This will be an uncomfortable process. However, it could spur more home purchases in the short term.
Although we are hopeful that bonds found a short term bottom, there is still great risk in floating. Any time markets move this quickly, predicting
a bottom is nearly impossible. If you choose to float, you could get burned. Be careful and only take risks you can afford to lose.