Friday December 16, 2010 1:43 PM ET
By John Sauro
Bonds Rebound
After weeks of selling Bonds were overdue to bounce back, and did so midday yesterday. Mortgage Bonds are higher today by 69 basis points as I write this.
This is due in part to the Fed’s buying of longer term securities this morning and the labor Department Report saying that 21 states and Washington D.C. experienced jobless rate increases in October and November.
Lenders re priced Mortgage Rates lower on the news. So, here’s a rare second chance to lock into a low rate. But don’t wait for rates to go lower as the trend for interest rates to move higher is still intact.
Remember Mortgage rates move in the opposite direction of Bond prices.
Is The Fed’s “Quantitative Easing 2” (QE2) Responsible for Higher Interest Rates?
Many economists believe that QE2 is the reason for higher rates. However, their may be other forces at hand.
There is speculation that the selling in Bonds is due to the worldwide reallocation of globally indexed funds away from sovereign deb. Add to that the recent tax compromise in the U.S. and extended tax cuts, and you have investors reconsidering holding long-term debt at low rates.
Will Rates Move Back Down to Their Low’s?
In late May to early June Bond prices fell 650bp, then rose straight up in July by 460bp, and then gave up 230bp in a few days.
However, during that time the Fed was committing to buying $100B a month in Mortgage Backed Securities, and mortgage transaction volume had slowed prior to the initial price decline. The lack of Mortgage Backed Security supply, along with the Fed buying, made for a significant rebound in prices, resulting in lower mortgage rates.
However, this time is different. The Fed is not buying Mortgage Backed Securities, and prior to the recent decline in Bond prices, mortgage rates were at all time lows. The Mortgage Backed Securities supply of refinances done in mid-October won’t get into the market until January. It’s a classic supply and demand issue. Remember, the Fed is trying to create inflation and inflation is the arch enemy of Bonds and mortgage rates, and therefore it is unlikely that we will see rates move back down to their lows.
For now I am taking a floating not locking bias towards mortgage rates.