Locking bias

With a report that stunned the markets, the Bureau of Labor Statistics (BLS) announced this morning that only 38,000 new jobs were created in the month of May. This was much weaker than the 158,000 number that was anticipated by the markets.  In fact, this was the lowest job report we have seen since September of 2010, which was a terrible time in the US economy. For a month that is typically adding seasonal jobs to staff up for stronger summer months, this was a tremendous disappointment.  As if that wasn’t bad enough, there were downward revisions to the prior two months’ reports totaling a combined 59,000.


In an effort to put a positive spin on the overall report, many pundits are focusing on the decrease in the Unemployment Rate which fell from 5.0% down to 4.7%. However, the reality is that the number fell solely as a result of 458,000 people leaving the labor force. This artificially makes it appear as if there was significant improvement in the US economy. The reality is that we now have more people who will be either dependent upon social services or will be using savings to support their living expenses. Either way, it amounts to fewer people paying into a system and likely more drawing against it.


Although initially this report is providing a boost to mortgage bonds, the fear will be that it will cause the Federal Reserve to hold off on raising interest rates a little longer. Ultimately, that is good news for the stock market and bad news for mortgage rates. It will be interesting to see how this plays out. However, it certainly can create increased volatility.


With bond prices right up against a significant overhead resistance level that has stopped rates from further improvement, the potential benefit to float is minimal. Therefore, the safe play will be to lock in and take advantage of the gift this unexpected report provided.

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