Position Yourself for Volatility

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Below is an important update on the state of the market. Summing it up, the volatility continues, today being a really bad day for us in the mortgage market with MBS (Mortgage Backed Security) priced in the tank again. If you recall, the previous two weeks were bad for MBS’s, with us effectively seeing mortgage rates going up .375% to .5% in that two week period. Things don’t look good for rates dropping much either. Conversely, there is a lot of pressure on rates to continuing creeping up despite the Feds massive buying actions to keep them lower.

What does this mean for you? If you have taken advantage of the historic low rates last year or this year, good for you. Odds are you will never see those rates again. If you are in the process of refinancing or buying now, expedite your requests for borrower documentation so that you don’t jeopardize your rate lock. If you have not taken advantage of the historic low rates, waiting to do so will probably be a bad bet. They are still great, but not phenomenal like they were.


Ken Thayer (ext. 209)      Karen Gledich (ext. 241)                Crystal Lopez (ext. 306)                  Haley Thayer (949-374-4143)

More details below:

Current Price of FNMA 2% Bond: $101.03, -44bp

Folks, this is a tough market, to say the least. The volatility in both stocks and bonds is very high as we balance economic reopening with more stimulus and question whether inflation will be a problem or not.

What we do know and what should be clear with clients and partners – the Fed is not touching rates anytime soon AND they are going to continue the bond-buying for quite a while – likely all of 2021.  And, should rates tick up too much – the Fed may be forced to invoke some sort of yield curve control to pin down long-term rates.  We did this back in the 40’s.

Mortgage Bonds opened the day lower and the 10-Yr yield has ticked up to 1.47%.  The trend for the past two days has been a lower opening for MBS followed by price improvement throughout the day – let’s see if it happens again today.

On the 10-year Note – the yield is 1.47% and the Core Consumer Price Index (CPI) is 1.40% – so essentially there is no “real” rate of return for 10-year Note.  Moreover, 10-year inflation expectations have ticked up to 2.16% – quite a bit above current inflation.  As we have been saying since last summer, the heightened inflation expectations along with the low 10-year yield is unsustainable.  At some point, for the 10-year Note to even be considered a wise investment – it must provide a return north of inflation and inflation expectations.  What does this mean to you?  Rates must go higher if inflation or inflation expectations rise from here.  It also means – your clients should be locking if they can.

A weaker than expected ADP Private Payrolls number, +117K versus +180K expected.  This number outright stinks.  We have 10M people not working.  Bonds would normally rally on such a miserable number, but they are looking at the reality that vaccines are flowing and states are re-opening.  Future numbers will be better.  With four states now fully open – and likely more to follow – better days are ahead.

And the Atlanta Fed thinks so as well. They just forecasted a whopping gain of 10% in GDP for Q1 2021 as economic activity is surging across the nation!

The Fed will be purchasing up to $7.76B in mortgage-backed-securities today. There are three operations from 10:00 – 10:20 a.m., 11:30 – 11:50 a.m. ET and 1:00 – 1:20 p.m. ET. The FNMA 30-yr 1.5%, 2% and 2.5% will see the bulk of the buying. We will be closely watching the action once the Fed exits for the day.

Technically, the FNMA 30-year 2% coupon is trying to stabilize but as we can see, volatility continues. We are looking to last Thursday as a possible bottom but realize the high volatility could make any snap-back rally short-lived, just like this morning.

From a pipeline management standpoint, if you have clients that can lock, by all means do – use the inflation theme for help.  It is tough to bet on lower rates in the future.  We may see some improvement here and there, but are reminded on days like today – the gains may be fleeting.  Otherwise, start the day floating and let’s see if the bonds can improve from opening levels like they did the past two days.  Also, watch the 10-year yield – we want to see it under 1.50%