Mortgage Rate Volatility

We have been saying for months that interest rates can move quickly and that this year has seen some dramatic rates changes. I follow a service called RateLink to keep track of the markets for mortgage backed securities. The service not only provides timely information that I use to make recommendations to my clients, but it also provides special reports that I like to share when something important is happening in the markets. This is one of those reports:

To say interest rates have been volatile in 2013 would be an understatement. Consider this, since January 1st discount points on Mortgage Backed Securities (MBS’s), the bonds that directly affect daily pricing have moved a full discount point or more six times. Two of the movements were close to 1.5 discount points, or put another way 3/8’s in interest rate. A movement of 1/2 a discount points or 50 bps has occurred 35 times, once every seven days on average. The volatility seen in 2013 will only intensify in 2014. You better have a plan.
Economies around the globe continue to grapple with the effects of the meltdown that occurred following the collapse of Lehman Brothers in 2008. That single event caused credit markets to freeze and exposed how reliant economies are on short-term liquidity. Many companies use ultra short-term loans to fund payroll and inventory purchases. Without access to cash the economy came to a standstill. Central banks here and “across the pond” took extraordinary steps to correct the funding issues and keep interest rates low to spur economic activity. When conventional policy tools were exhausted the Federal Reserve and the Bank Of England started an unconventional program called quantitative easing (QE). QE is basically the government printing money to purchase bonds. Just like any commodity when there is high demand prices of the commodity will rise. That is good for bonds because interest rates fall when bond prices rise. There is an inverse relationship between the two. We saw the benefits of QE first hand by quoting 3.5% 30-year fixed rate mortgages.
Five years and $4,000,000,000,000 ($4T) dollars later the US economy is in a “recovery”. Unemployment has fallen to the low 7’s and Gross Domestic Product (GDP), a summation of economic output is in the mid 1% range. The cost benefit ratio to QE is hotly contested on Wall Street, however it does look like the economy is moving in the right direction. Now comes the hard part, weaning Wall Street off of the easy money.
The debate over tapering asset purchases will intensify as economic data continues to show improvement. The Fed told us which data points they are watching and we would be wise to watch them as well. Any reports on employment, inflation (not an issue now) and the consumer (retail sales, sentiment etc.) can cause outsized market movements. RateLink was warning subscribers on Monday 11/18/2013 to be careful Wednesday 11/20/2013. Discount points rose 3/4 Wednesday following the release of the minutes from the last Fed meeting.
You must know in advance when the market is most likely to be volatile to provide exceptional customer service to your referral partners and clients. Mark your calendar.
Important Dates through the end of the year:
11/26/13 Consumer confidence
11/27/13 weekly jobless claims
11/27/13 consumer sentiment
12/05/13 weekly jobless claims
12/05/13 GDP
12/06/13 November unemployment report (A BIGGIE)
12/12/13 weekly jobless claims
12/18/13 Fed Meeting (A BIGGIE)
Now you know the day’s rates are more likely to be volatile. Have a plan.

Provided courtesy of

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