Locking bias

Mortgage bonds fell sharply this morning, continuing the downward channel that developed several days ago.  This sell-off was primarily triggered by comments made by Fed President Janet Yellen in a prepared speech this morning.  She stated that waiting too long to hike would be unwise.  Since this increases the odds of a March rate hike, bond prices fell in response.  Prior to today, the odds that the Fed would make a move in the March meeting were relatively low.  However, given the continued growth in the labor market, uptick in inflation as well as overall strength in economic reports, we feel the Fed needs to hike to stay ahead of rising inflation.  Otherwise, they would need to make more dramatic moves in the future to hold inflation at bay. 

Overall, the outlook for mortgage interest rates does not look good.  Not only will the market have an increasing Fed Funds rate to contend with, but many of the policies and plans of the Trump Administration are not friendly to the longer term forecast of mortgage interest rates.  Primarily, those that have influence over inflation.  For example, reducing the corporate and personal tax rates are highly inflationary.  Further, any plan to stimulate continued job growth, especially now that we are near what the Fed considers “full employment” are also highly inflationary.  Not to mention decreasing the number of illegal immigrants, which will also result in wage inflation.  These combined could make the future of mortgage interest rates significantly higher than they are today. 

Although it goes without saying, we will maintain our locking bias.  Congratulations to those who locked a few days ago.  At this moment, that appears to have been a wise decision.