Soft float

Mortgage bonds managed to minimize their losses yesterday as they bounced higher when the market opened this morning.  This significant move has fueled hope that bonds will have the strength to continue to climb higher and break out of the powerful downward channel that has driven mortgage rates higher since the early in November.  Typically, after a sharp drop in bond prices, there is a temporary recovery that follows.  Although the recovery may just last a short time, it can provide a brief opportunity for potential borrowers to achieve a slightly better interest rate.  Could this be the recovery we have been anticipating?  We will have to wait and see.  We must first confirm that bond prices are stable and protected by a strong floor of support.  From that point, they will have the ability to make a run higher. 

Today is another slow economic news day, so markets will trade heavily based on the fundamental picture.  The stock market has turned negative this morning, with the Dow still just beneath the 20,000 barrier.  This is partially what is helping to fuel mortgage bonds. 

One significant dynamic that we could see in play currently, or in the near future, is the rebalancing of mutual fund portfolios.  By mandate, they must maintain a pre-set ratio of bond, stock and cash holdings.  With the US stock market being as strong as it has been, many mutual funds contain an over-weighted ratio of stocks.  Thus, they are forced to sell some and purchase bonds or convert to cash.  This could help slow stock growth and help improve mortgage bonds.  That would be welcomed news for mortgage interest rates as we head into 2017.

Although bond prices are doing well, we still have not confirmed a decisive break out of the downward channel.  Therefore, the risk of floating remains elevated.  Since there is no need to immediately rush to lock, if you choose to float, do so carefully.  Sentiment can change quickly.