If you choose to float, be very cautious

The stock market has blown past previous all-time highs today, and is set to establish a record close this afternoon.  In spite of an extremely strong stock market, mortgage bonds have continued to hold near record low interest rates.  Bonds have remained in a sideways channel for quite some time, which is showing a fundamental strength and wherewithal in the market.  Considering that Quantitative Easing is no longer there to help boost bond prices, many economists are astonished that mortgage rates haven’t jumped higher.  Most respected economists were predicting rates to be somewhere between 4.625% and 6%.  Considering that today’s rate on a 30 year fixed for a borrower with excellent credit is as low as 3.75% with paying less than a 1% fee, we need to see this as a gift and an opportunity to have another chance to secure a better interest rate or make a home purchase.

The Producer Price Index was reported this morning up 0.2%.  This was a higher reading than the -0.1% anticipated.  However, the markets didn’t react negatively to the news because this measures inflation at the manufacturing level.  Since this doesn’t always translate to higher prices paid by the consumer at the cash register, it is widely ignored.  When we see significant price increases on the consumer level, we will then be worried about the impact to mortgage rates and the direction of the Federal Reserve with pending increases to the Fed Funds Rate.  For now, we can sit back and be grateful for the limited inflation that has been passed on to the consumer.  With inflation being the arch enemy of mortgage interest rates, the low levels of inflation we have had the past few years is greatly responsible for mortgage loans being as affordable as they currently are.

Mortgage bonds have pushed above resistance of the 25 day moving average, and are now fighting to hold on.  We will continue our carefully floating bias as we give bonds an opportunity to make a run higher.  If the stock market continues to climb higher, this will add further pressure to mortgage bonds and will likely cause us to move to a locking bias.  Watch the markets closely if you choose to float, and be ready to lock at a moment’s notice.