Upward Pressure on Interest Rates Continues

Mortgage bonds fell sharply in early market trading. The Head-and-Shoulders pattern we identified in Friday’s market update helped us to correctly predict this downward move.  The U.S. stock markets are down for the first time in 2018.  Given the level of optimism, I expect stocks to cover and add further downward pressure on mortgage bonds, which will push mortgage interest rate pricing higher.  Although it has taken longer than I anticipated, I still expect bonds to test the bottom of their current channel.  If that level fails to hold, mortgage rates could take a turn for the worse.

Economic activity continues to flourish in the U.S. as optimism over the recently passed tax reform bill drives consumer and corporate spending higher. It seems that the last leg of our economic plan to recover is inflation.  It has been stubbornly low for many years, which has kept long term interest rates below desired levels.  Although this has been great for the housing market, the Fed would like to see the long end of the yield curve rise.  The distance between short and long-term note yields is now only .5%. When the short-term yields exceed long term yields, a recession can be expected within one year or so. Therefore, the Fed is carefully watching these levels to help do what they can to prevent this from happening.  However, since long term yields are determined by the market, the Fed only has indirect control over such levels.  The short-term yield curve is where they have the power to influence.

I see bond prices falling to the bottom of their channel and then hopefully bouncing higher. This means worse mortgage pricing in the immediate future.  If you need to close quickly, we maintain our locking bias.