Mortgage Bond Market Analysis - Happy Hump Day (first one of the year)

All good things must come to an end.  I don't know who said that and I don't necessarily believe it - my marriage won't come to an end but that's another topic for another time.  "Good" is also a matter of perspective.  Here's the deal:  we've had a really nice run over the last couple of weeks in the mortgage bond market but today we received some surprisingly strong numbers in the ADP Private Payroll Report - 241 vs. expected of 226 and last month's numbers were revised upward by 19K.  This is good for the economy - more jobs means more people can afford to buy homes, cars, and many other consumer products which creates more jobs for others.  However, as the economy strengthens, interest rates necessarily increase so as to keep it from growing too fast which would cause inflation.  The Fed's target rate for inflation is about 2% - we have been below that for a while and interest rates have been necessarily low to help the economy grow.

With the strong ADP numbers this morning, investors / traders act like giddy school girls after their first kiss and sell their "safe" bond investments to get cash to move into more growth-oriented equity investments.  Hence the sell-off this morning.  The downside to this good economic news is that as the bonds sell off, interest rates, which move inversely to bond price, increase so those people who are in the process of buying a house and haven't locked their rate will be looking at higher rates if the sell-off continues.  Currently the benchmark FNMA bond is down 25 basis points so that's really no big deal especially since rates are extremely low in the first place.  However, it is important to be reminded how everything fits together and to know that we've got more employment-related data coming out this week that could be the impetus for further sell-off and even higher rates.  Here's this morning's chart:

From a technical standpoint, the benchmark bond is still overbought.  Even with economic news that isn't that great, we could experience some more sell-off which would be nothing more than investors taking some profits off the table.  It's important to remember that in addition to our economic data, there are other things that drive rates such as geopolitical events as well as the economic news from around the world and lately that news from China and Europe has not been very good which has been one of the factors in the recent run-up in the bond market.

Tomorrow we get the weekly Jobless Claims numbers.  With strong numbers from ADP this morning, I would expect that we will have more good news tomorrow.  It doesn't always work this way but I'm conservative and think it's better to be safe than sorry (in most cases).  I would lock today (although the GNMA bond is underperforming the FNMA bond so it's taking a bigger hit so the impact for rates is greater for FHA and VA).  Low oil prices are helping to keep bond prices low in addition to the weak economies around the world so even some good jobs number on our side of the pond might not be too bad for rates.  Many days I will provide an update or two regarding the bond market on my facebook business page so you may want to like The Wunderli Team page to make sure you stay up on what's happening.  Please feel free to share your thoughts in the comments section and call me if I can help in any way regarding a mortgage - 702-812-1214.