Market Update

Friday November 5, 2010 5:54 PM ET

By John Sauro

 Bonds End the Week Higher

Bonds were able to finish the week 62 basis points higher than where they started on Monday, but not without volatility and uncertainty.  Traders were nervous in anticipation of Wednesdays Fed QE2 announcement and today’s jobs report number pressured Mortgage Bonds 47 basis points lower on the day.  In all Mortgage Bonds actually gained 62 basis points for the week. Bonds broke below the 25-day moving average, but remained above the 100 day moving average.

Take a look at the Bond chart below for a better picture of the volatility.

The Fed’s Quantitative Easing Plans

      On Wednesday, the Fed announced it will be buying about $110B or so per month…or just under $1T of Bonds by the end of June 2011.  The news sent Bond prices dramatically higher and then lower, before ultimately moving even lower.  The Fed chose another round of Quantitative easing to spur spending, help lower the unemployment rate by boosting the economy and to push stock prices higher.  However improvements (if it works) in these areas will mean higher mortgage rates down the road.

      Back in the Fall of 2008 when the Fed announced the first round of quantitative easing- Mortgage Bonds initially moved higher on the announcement, but once the Fed initiated the buying of Mortgage Bonds, home loan rates didn’t move lower. It is likely this same scenario will play out this time around as well.

      Another reason why rates may not move materially lower,  is that lenders are backed up with processing and underwriting loans.  Therefore, they will not move rates lower as they don’t want to increase production they can’t handle.  Lenders are discouraging rates locks of less than 60 days as many of them cannot process, underwrite, approve and close loans in less than 45 to 60 days.

      The smart money is locking into mortgage rates at current levels.  Look at it this way; if you can save $400 by locking in now, don’t gamble that away to save an additional $100 if rates were to move lower.  Ask yourself. How good are you at timing the stock market or knowing when to walk out of the casino.