“Sell in May and go away”…that is how the old saying goes for Stocks. But it is Bonds that are having a very rough May. And for you long-time readers, this isn’t the first time we have seen Bonds get roughed up headed into the Summer months. In fact, over the last two years Bonds started rising from very low levels on the heels of a May selloff and then rallied sharply in August 2011 and 2012. Let’s hope this is the case this year and we may see Mortgage Rates move to the lower levels seen earlier this year. Now this doesn’t mean that you should wait until August to lock into a low mortgage rate. Rates are still very low historically. The advise is to lock into Mortgage rates in the short-term (days weeks) and float rates longer-term, weeks and months if your time horizon allows for it. With possible global pitfalls like Japan, Europe, etc – we would not be surprised to see Bond prices higher than current levels in the not too distant future.
For you new readers, its important to understand the connection between Mortgage Bonds and Mortgage Rates. Higher Bond Prices means Lower Mortgage Rates and vice-versa.
Mortgage Bonds opened lower and selling accelerated after Retail Sales unexpectedly rose by 0.1% in April, better than the -0.3% anticipated. Bond prices are attempting to stabilize, but a drop below the next floor of support, 75 basis points beneath current levels could signal aggressive selling and push Mortgage Rates higher.
There are a lot of economic reports this week that could affect Mortgage rates, such as housing, inflation, manufacturing and consumer sentiment. The recent selloff in Bonds is a bit overdone and prices are due for a bounce.
Feds Bond Buying Program Keeps Mortgage Rates Low. How long will it last?
When will the Fed end ultra-easy money? Not before year-end…maybe well into 2014. Even then it’ll be a gradual weaning, a year or more from start to end. And the Federal Reserve will maintain the flexibility to change direction…tacking back and forth…as the economic winds shift. It might even increase its easing at first…an effort to lift an economy burdened by federal budget cuts. The first step: Cut back Fed bond buying to about half the current pace of $45 billion in Treasuries and $40 billion in mortgage debt a month. Next, quit replacing maturing securities purchased under its policy of quantitative easing, letting them roll off the central bank’s balance sheet. Then, start selling off securities it holds. And finally, ratchet up interest rates.
For the Fed to begin pulling out the props, it will take consistent, strong signals of growth. Three straight months of robust job gains… 200,000-plus net new jobs in each. That’s a tall order, especially considering that with the budget sequester, Uncle Sam, as well as many government contractors, will shed jobs in coming months. An unemployment rate headed down. Though the Fed has made it clear that it won’t hike interest rates till unemployment is near 6.5%, it won’t take that much to spur a shift into neutral on quantitative easing. And strengthening GDP growth.
Other signals that Fed Chm. Ben Bernanke and company will watch for: More hours worked, indicating that employers anticipate better sales. Up from 33.8 a week in mid-2009, the current 34.4 average is around the 2006 level. Steady to increasing utilization of industrial capacity, too. Now at 78.5%, it’s well up from the recession low of 66.9% and approaching the 80% threshold that typically signals “full” use. Much over 80%, and the danger of inflation sets in. And an uptick in real disposable personal income… still 2% lower than in 2008 on a per capita basis. To fuel growth, consumers need more in their pockets. Odds of such a scenario much before 2014 are slim. Indeed, we expect the economy to weaken this summer as budget cuts take a toll. But that should be temporary. GDP should start to pick up somewhat this autumn. But the monetary gurus won’t be quick to pull the trigger. Growth has swelled, then swooned, multiple times since the recession ended. The Fed will want to be sure of steady gains before it tightens the money supply.
Bad Players Still Behaving Badly-
N.Y. Attorney General to Sue Bank of America & Wells Fargo
New York Attorney General Eric Schneiderman said Monday he plans to sue Bank of America Corp. BAC +4.25%and Wells Fargo WFC +0.60%& Co., alleging they breached the terms of a landmark mortgage settlement.
Mr. Schneiderman alleges that the banks violated agreements over how to deal with homeowners seeking mortgage relief under the $25 billion settlement reached between 49 states and the country’s five largest mortgage servicers. The settlement included 304 “servicing standards,” or rules over how to conduct fair and timely service to homeowners applying for some sort of relief. Mr. Schneiderman said his office found 339 violations of those standards by Wells Fargo and Bank of America since October 2012.
Mr. Schneiderman said Wells Fargo and Bank of America “flagrantly violated” their obligations under the terms of the settlement and put “hundreds of homeowners across New York at greater risk of foreclosure.”
Sources: CNBC, Bloomberg, Kiplinger, MMG, Housingnewswire, NY Times