Watch closely…it could be an exciting day

After setting new all-time highs again yesterday, the stock market is down so far this morning.  Mortgage bonds were able to hold above support through yesterday’s stock market climb higher. However, this morning the pressure was too great to hold, which forced bonds to break beneath support.  Surprisingly, bonds were strong when the stock market was also strong, and bonds broke down when weakness developed in the stock market.  This isn’t typical behavior for the bond market, which will usually move in opposition to the stock market.  Because both markets compete for the same investment dollars, a strong stock market typically creates weakness in the bond market, causing mortgage interest rates to move higher.

The Mortgage Bankers Association released Mortgage Loan Application data this morning.  Purchase loan applications were up an astonishing 12% from the prior week, reaching the highest levels seen since the strong summer buying month of July.  This welcomed news was fueled in part by the low mortgage interest rates we have seen lately which gave many potential homebuyers a reason to step back into the home buying market to take advantage of the savings.  The strength of this report brought the year over year number to within 6% of where home purchase applications were last year at this time.

At 12:00 p.m. MST we will get the Fed Meeting Minutes from the October 28-29^th Fed Meeting.  Since this was the meeting at which the Fed formally ended Quantitative Easing, we need to be on guard for a possible negative reaction in the markets.  Historically, the bond market doesn’t perform well on days when the Minutes are released.  The Fed has a tendency to dramatically move the markets.

With mortgage bonds beneath support, we are going to start the day with a locking bias.  The potential for volatility with the release of the Fed Meeting Minutes is high.  Therefore, we feel the prudent strategy is to take a safe approach.  However, with the stock market falling lower, that could help support bonds.  It is unlikely that bonds will be able to gain any ground unless the Fed Meeting Minutes are bond friendly and help build upward momentum.  Watch closely.  It could be an exciting day!