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Wednesday, March 16, 2016

Mortgage Bond Market Analysis - Fed Decision Day

The day of reckoning has come.  It's Hump day and at 2:00 p.m. EDT the Fed will announce what they have decided with regard to the Fed Funds rate.  It's expected that they will leave the rate the same so if they do that, the market shouldn't have much of a reaction.  What isn't known is what Janet Yellen will say in her interview after the interest rate announcement.  What she says will be key to what the market does.

Economic data that could impact the Fed:  Yesterday and today gave us some key data points that may change the Feds tone and create a bit of worry for bond traders.  Yesterday, January Business Inventories were up .1% vs. expectations of .0%.  March Homebuilders' Sentiment came in at 58 vs. estimates of 59.  Additionally, the NY Empire Manufacturing index blew away expectations of -.1 with a reading of +.62.  Perhaps most importantly, the YOY Core CPI came in at 1.2 vs. expectations of 1.1.  February Retail Sales were as expected at -.1%.  Most of this data is better than expected and was negative for pricing as the FNMA benchmark bond closed down 23 basis points.

This morning, Building Permits came in lower than expected at 1.167M vs. 1.2M expected.  On the other hand, Housing Starts beat expectations of 1.15M with a reading of 1.178M.  Most importantly, the YOY Core CPI came in at 2.3% vs. expectations of 2.2%.  This might get the Fed thinking about raising rates sooner rather than later and traders will be listening for comments from Yellen that might give a clue as to when they might start hitting the gas pedal.  For the Fed, it's a bit like walking on egg shells because the economy is still very fragile and Europe and China are also facing major challenges as well.  Additionally, the last time the Fed raised rates (December), the stock market had a huge sell-off which wasn't good for the economy.

In my post on Monday, I recommended to lock ahead of the Fed announcement; locking Monday would have been best because of the down day yesterday and the fact that the benchmark bond is currently down 9 basis points, although it is 16 basis points off its morning low.  The RSI is just below the oversold threshold but I think this has little importance to what traders decide to do relative to all of the other things they are considering.  Some experts are recommending to float heading into the Fed announcement as long as you have access to the bond market (which you do with my app - buyerZapp - upper right hand corner of my blog) but I think that if Yellen says the wrong things, the market could move VERY quickly and you wouldn't be able to act quickly enough to avoid locking at a worse rate.  I would play it safe and lock - the market is bearish and the risk of a further sell-off in bonds is greater than the likelihood of traders deciding to buy bonds.  If you lock now and rates improve, you've still locked at a great rate and if they improve enough, you may be able to float down, depending on your lenders lock policy.  We have the ability to float down and I would love to help you or a client / friend with a mortgage.  Contact me if I can assist in any way:  702-812-1214, 801-853-8720 or  Make it a great day.

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