Last week I wrote about interest rates and noted that:
- The wholesale cost of money was dropping,
- Lenders were catching up on their backlog from January and February, and
- Consequently interest rates might make a strong move to the downside.
I was wrong, dang it.
The margin between wholesale and retail pricing almost always returns to “normal” (although normal changes over time) so if wholesale pricing dropped, retail pricing had to follow. But wholesale pricing didn’t drop – it rose. What happened?
The Board of Governors of the Federal Reserve (The Feds) met on Wednesday, and it turns out large investors were a little concerned about what they might say and how that might affect the market.
Most analysts predicted that the Feds would make a major announcement about, well, nothing. To paraphrase, the expected results were “It all looks the same and we’re going to sit on our thumbs.”
In fact, what the Feds actually did was issue a statement to the effect of “It all looks the same and we’re going to sit on our thumbs.”
Since the analysts were pretty much in 100% agreement that this was going to be the case, I assumed investors would not pay that much attention to the Fed meeting, and that bonds would not be affected. As it turns out, that was not correct.
Despite the universal agreement among analysts, investors did care what the Feds said, even if they said nothing.
So what now?
If you look at the chart to the left you’ll see that the ten-year bond (red line) rose up a little last week, and then tapered off slightly at the end. The Fannie Mae 60-day yield (think of this as the wholesale price of conforming loans) rose with it but has not yet tapered – it always lags a bit on the downside. Actual locked loans according to the Freddie Mac Mortgage Market Survey (green line) were slightly higher than the week before, as to be expected.
This time there is no clear direction to the trend. It could go either way, or nowhere at all. The spread between the 10-year bond and the 60-day yield seems stable this week, although there is a hint of a widening spread at the very end. So let’s examine what economic news might drive rates next week:
Monday we have Factory Orders, a measure of manufacturing activity. Analysts seem to be predicting a large increase in activity after a bad winter and the longshoremen strikes this winter. If the report surprises to the upside this could cause rates to rise.
Tuesday we have a number of reports due out but none that are expected to move the bond market.
Wednesday several events could move the market. Employment and Productivity reports will be released in the morning, along with a very important report, Unit Labor Costs. Analysts expect productivity to decline slightly and unit labor costs to rise substantially. Both of these hint at inflation which pushes interest rates up. The analysts’ consensus is probably already priced into the bonds, so if they hit as expected we should have little movement as a result. However, if they surprise in either direction it could push bond yields up or down substantially.
We should also mention that Janet Yellen is giving a speech later on Wednesday morning. It’s not directly related to Fed activity, but when Janet Yellen speaks, people listen.
Thursday brings us the Weekly Jobless Claims report every week. After the lowest report in years this last week, analysts expect a slight rise. Missing in either direction could substantially impact rates, as this is an early inflation indicator.
Friday is chock-full of important reports that could be major market-movers: Non-Farm Payrolls (job creation), Unemployment Rate and Average Hourly Earnings. All are expected to show stable, slow growth. Surprises in any of these reports could be market-movers.
We’re looking at potentially a volatile week next week for the bond market. Mortgage investors like stability, so even if the 10-year bond moves down it’s unlikely that the mortgage rates will follow quickly or closely.
However, you can see in the chart above how all this year mortgage rates have moved within in a very small range, and they are now sitting at the very top end of a range they’ve kept for six weeks. In order for rates to go higher they would have to break out of that range, which takes extra effort, and therefore surprises. Barring unexpected pressure upward rates are not likely to break out. So, if the market remains unstable as expected, rates are unlikely to go down (much) and unlikely to go up (much).
Finally, we should keep some perspective on this. Interest rates are about 0.125% to 0.250% off of the bottom of the market for this year. By any measure (especially historical) rates are incredibly low. If you have not yet started your application, it’s silly to wait until rates drop again to start, as they just might not. I Know. I’m still waiting for Apple stock to drop back down to $5, which is where it was when I first thought of buying it. I could have, you know…