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Wednesday, October 5, 2016

Mortgage Bond Market Analysis - Did you lock?

Happy Hump Day.  My calendar is a bit off this week since I was still on my short vacation on Monday so yesterday was my Monday and it's hard to believe that it's already Wednesday.

On Monday, September 26th, I recommended locking as I thought we were close to the top if we weren't there.  I thought there was a much greater risk to a sell-off than there was potential for more significant buying.  The next day gave us five more basis points, which is basically nothing as about 50 basis points is .125% in rate, and on Wednesday morning with the market opening a bit higher, I reiterated my recommendation to lock.  I thought the data, as well as the fundamentals of the bond, warranted it.  Let's take a look at the chart:

The FNMA benchmark bond closed down 13 basis points on Wednesday and then bounced back 4 basis points on Thursday.  It closed down another 5 basis points on Friday and 6 on Monday followed by a 34 basis point fall yesterday and it's currently down 12 basis points for a total of a 66 basis point loss since my lock recommendation - this translates into an increase in rate of about .125% plus some additional costs for the new rate.
The Economic Data
It's Jobs Week and the ADP Private Payroll Report came out today and it missed expectations, coming in at 154K (on the weak side for a "recovery") vs. 166K expected.  The real kicker today is the ISM Non-manufacturing Index (Services) which came in at 57.1 (very strong) and obliterated the estimates of 53; this is very bad for pricing although the ADP numbers will offset this to some extent.  Additionally, August Factory Orders were .2% vs. estimates of -.1% - also negative for pricing (which means bad for rates).

Where do we go from here?
Much of it depends on the data the rest of the week with a few key data points being released including Jobless Claims tomorrow (not usually a big market mover) and Non-farm Payrolls, Unemployment Rate and Wholesale Inventories on Friday.  With the sell-off, a lot of profits have been taken off the table so we could see some buying if the data warrants  it.  Potential buying will also be dependent upon where the bond closes today.  If the 1st level of support (103.40) holds - it is at 103.46 right now - traders could have confidence that we've reached a bottom for this little run and with the right data, they could decide to buy a bit.  The fact that the RSI is also approaching oversold could help.  I have two thoughts, though.  The first is that our high last Wednesday of 104.28 was the highest points since the bond hit 104.40 on July 6th - a day where it ended up closing down.  We are now 82 basis points off our recent high and while we could see some rebound in bond prices based on reasons just mentioned, I don't expect the buying to push prices beyond recent highs.  The other side of that coin is that while expectations for a rate hike are for the December meeting at the earliest, we also have the election which brings much uncertainty as does the geo-political events that are happening.  Uncertainty is good for bonds since they are considered safe-haven investments.  The perception of who our president will be and how he / she will do will also play a role in the decisions of traders to buy or sell bonds.  For now, I would float with caution.  My guess is that the jobs numbers will be on the weak side, even if they meet expectations.  If you do float, make sure you are staying on top of the market in case of a quick move in the wrong direction so that you can lock quickly, perhaps before a re-price for the worse.  I'm always happy to help so feel free to contact me if I can help with anything mortgage related - 801-893-1737 or 702-812-1214.  Make it a great day and a better finish to your week.

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