Markets are continuing to show tremendous volatility, with bonds opening this morning erasing all the gains earned over the past two days. This fall was driven by news from the European Central Bank (ECB) that they will be expanding their Quantitative Easing (QE) or Bond Buying program by 9 months until the end of next December. However, they are cutting the number of bonds purchased from 80B Euros per month down to 60B Euros. Although the market was anticipating the extension of QE, it was not expecting the quantity of bonds being purchased to be reduced. This news drove interest rates higher in many major global fixed investments, as a greater return will be needed to compete with higher international returns.
Sharp movements in bonds are occurring more frequently than normal, as investors are more quickly responding to changing polies and indicators of future economic strength in the US economy. Combined with a Federal Reserve interest rate hike announcement that we will receive next Wednesday, this path will likely continue. Overall, volatility hasn’t been friendly to mortgage interest rates, as the ratio of data has swayed from negative to positive. This has sparked fears of inflation and continued wage growth, both of which are not in line with a low mortgage interest rate environment. The coming year could be interesting.
With bond prices varying widely from day to day, the safe play remains to maintain a locking bias.