May 9, 2014

Mortgage Rates Drop to 3-Month Lows Ahead of Important Data

Mortgage rates fell at the fastest pace in over a month today bringing them to their lowest levels since early February.  The motivation for a move of this size isn't readily apparent, but tomorrow's Employment Situation Report is likely a factor.  The underlying reasons for that are complex, but the gist of it can be explained with an analogy. 

The financial market participants that trade the securities that end up affecting mortgage rates are like attendees at a sporting event.  They may be out of their seats, moving around the stadium, getting a drink or what have you in the time leading up to the start of the game, but there's some sense of urgency to take one's seat and pay attention to the opening pitch, kick-off, jump-ball, etc.

In this metaphorical stadium, there are no assigned seats either, so there can be jockeying for position right at the start of the game and the moments leading up to it.  The same is true for the jockeying of trading positions in financial markets.  Simply put, everyone is trying to find their best seat before the game starts--their best balance of trading positions before the big employment data.

This frequently leads to the sort of faster-paced movement we're seeing in bond markets today.  Unfortunately, that's tended to go against us on most instances of the big jobs report, but this time, it's been in our favor.  The important thing to understand about it is that it's NOT necessarily indicative of where rates want to go tomorrow.  It just happens to be the easiest spot from which to approach and digest the first play of the big game.  With no assigned seats in this stadium, if that play moves to the other end of the stadium, traders will follow in an even more frantic manner.

What does that mean for you?  Essentially, "lock if you got em."  It could be the case that the jobs data is much weaker than expected and rates continue to improve.  But the fact remains that we have the best rates in 3 months today and a report tomorrow that is more than capable of causing this welcome move lower to turn around and head higher.  To be clear, tomorrow is ultimately all about how the jobs report comes in, but from a risk/reward standpoint, there are few clearer locking opportunities.  In fact the riskiest aspect of locking today is that it seems like such an obvious choice.
The most prevalently quoted conforming 30yr fixed rate for best-case scenarios (best-execution) moved down to 4.25% in most cases, but 4.375% is still close.

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