Some financial news networks are calling this moment the fundamental shift in the bond market. Since last week, the US bond market has lost more than $1 trillion in value. That’s a significant loss and a move that greatly impacts the balance sheet of the Federal Reserve. Since they own the lion’s share of existing mortgage backed securities as well as a large share of the 10 Year Treasury Note market, the move lower in bond prices has cost the Fed a great deal of net worth. None the less, Fed members have hoped for a rise in the rate of inflation. If bond holders are right in their expectation of higher consumer prices ahead, the Fed may soon be getting what they have fought for the past eight years.
Mortgage bonds have now officially lost all the gains they made in 2016. Shockingly, it took only 4 trading days to do this. The big question is: Where do interest rates go from here? In looking at a longer-term bond chart, over the past few years there was a time ranging from June 2013 – October 2014 when prices were lower than they are now. From May 2013 – September 2013, bond prices fell about 860 basis points. This makes the current loss since last week of about 250 basis points look like a small blip in the market. Nonetheless, it is extremely painful for those in the process of getting a home loan or hoping to buy a home soon.
Mortgage bonds attempted to stabilize today. However, it could just be a temporary improvement before the downslide continues. Therefore, we will maintain our locking bias. If you are able to watch the market closely and choose to float, make sure you are ready to pull the trigger if the market begins to soften.