Mortgage bonds had a terrible day on Friday following a stronger than anticipated Bureau of Labor Statistics Jobs Report. The stock market also suffered its worst single day losses of 2015 following the report that many believe has backed the Federal Reserve into a corner, forcing them to raise short term interest rates to help slow an overheating job market. However, without signs of inflation, this puts the Fed in a difficult situation. If they raise rates too soon they could lose some of the gains in overall economic strength they have made as well as show inflation even further. However, if they fail to act they could create an economy that will need much harsher rate hikes just to try to prevent the job growth from creating excess inflation. Either way, the Fed is at risk.
One of the key external drivers keeping mortgage interest rates lower is the rate of returns offered by European bonds. The European Central Bank (which is the US version of the Federal Reserve) announced a bond buying program similar to the US Quantitative Easing program. This has pushed yields on Germany’s equivalent to the 10 Year Treasury Note down to 0.31%. When you compare this with the 2.21% currently offered in the US 10 YTN, foreign investors are able to earn a much larger return by purchasing our bonds vs. bonds in Germany. The volume of foreign investment is helping to drive our bond prices higher, which in turn drives interest rates lower. This force is likely to continue to play out as our yields move higher and their yields move lower.
Mortgage bonds are now beneath most significant support levels and are trading in a wide range that is capped by the 100 day moving average. The market has not treated bonds kindly for well over a month now, and there is no sign of any significant improvement in the near term. For now, we will maintain our locking bias. If you have a loan in process, you may want to consider protecting yourself from the volatility and continued damage in the market. Rates are still at amazingly low levels. It is still a great time to buy or refinance a home.