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Monday, March 21, 2016

Mortgage Bond Market Analysis - The Schedule for the Week

It's Monday with no economic data and the benchmark bonds are selling off.  Currently the FNMA benchmark bond is down 19 basis points while the GNMA is down 39 basis points.  Oil is basically flat so what's driving the market?  I think that traders saw an opportunity to take some profits off the table after a nice little run and ahead of a number of Fed talking heads this week - just to be safe.  Today we are getting comments from Locker, Lockhart and Bullard.  Tomorrow we will hear from Evans and Harker and on Thursday we will hear from Bullard again.  S.F. Fed President John Williams told a publication that he would be advocating for a rate hike at the April meeting so this probably also gave traders a reason to sell bonds.

In addition to the messages we will get from the talking heads (not the 70s alt rock band), there are a few other things that could impact bond prices and, by extension, interest rates this week.  Durable Goods Orders could have an impact; a strong reading would be negative for bonds (but good for the economy).  Oil prices will continue to impact bond prices - as oil goes up, bonds usually sell off and vice versa.   Finally, any geo-political event that signals instability can impact bonds although these are not scheduled and so the surprise factor and have a bit of a multiplier effect as well.

I like to keep some perspective on the movement of interest rates, especially when the trend is up.  When we as individuals are buying a house and looking to lock a rate for our mortgage, we want the rate to be as low as possible.  Keep in mind, however, that rates are low when the economy is weak.  Historically, when the economy is strong, rates are in the 6%-7.5% range.  As the economy gets stronger and inflation starts to raise it's head, the Fed increases rates to try to slow growth and inflation.  Inflation devalues the dollar - as prices rise, our dollars buy less.  The flip side is that for those who own assets, inflation in the form of asset appreciation is a great thing.  When the economy is doing well, businesses have increasing profits (quarter over quarter) which leads to increasing stock prices and higher values on our investment accounts.  When the economy is strong, there are more good jobs which means more people can afford to buy homes and then things they need to fill those homes which helps those companies who make the things that go in the homes and allows them to make more money and offer more jobs so that more people can buy homes.  As more people buy homes the law of supply and demand dictates that home prices rise and when that happens, current homeowners might find that they have enough equity in their home to be able to afford a move-up home after selling their current home.  All of this means a lot more transactions for Realtors, loan officers, title companies, insurance agents and such which means they can afford to do things like buy homes.  With all of the people needing mortgages, the demand for money increases which also helps push rates higher.  There's more to it than this but I've probably already exhausted your attention.  Suffice it to say that the country as a whole and we as individuals are all better off with higher interest rates EXCEPT for the part where we are locking in that higher rate but if we have more job security and a higher income, it's probably not a bad offset.  If you pay enough in interest to itemize your deductions, keep in mind that some of that higher interest rate is being subsidized.

At any rate (yes - pun intended), I would lock if you haven't already.  To paraphrase Forrest Gump, rates are like a box of chocolates, when the talking heads speak, you never know what you're going to get.  Contact me if I can help with anything (702-812-1214, 801-853-8720 or and feel free to share your thoughts in the comments section.  Make it a great day and a better week.

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