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Looking Back And Looking Ahead : October 27, 2008

2008
10.27

>Mortgage markets followed the recurring trading pattern of 2008 last week — volatility, volatility, and more volatility.

After opening with a strong performance that drove rates down, late-week fears of a global recession reversed that path. Mortgage rates ended the week unchanged.

This was an unexpected outcome for the week considering that:

  1. The dollar gained 5%, making bonds “worth more”
  2. Oil fell 11%, helping to spur consumer spending
  3. LIBOR dropped slightly, signaling a credit thaw

Each of the above factors usually helps to generate new demand for mortgage bonds, pressuring mortgage rates lower.

But, this market is anything but normal. Because of the stock market’s weak showing last week, several hedge funds were forced to liquidate their holdings and move into cash. The rampant selling dumped an excess supply of mortgage bonds onto the market, offsetting the favorable bond market conditions, and causing mortgage rates to rise sharply from Wednesday to Friday.

Unsuspecting rate shoppers found this out the hard way.

This week, mortgage markets should be similarly unpredictable — there is a bevy of economic news and government news on which markets will chew, digest, and attempt to swallow.

On the economic side, the two most influential data points are the Consumer Confidence survey, and Personal Consumption Expenditures. The former will be used to predict Holiday Season shopping — a weak reading should cause mortgage rates to rise — and the latter is the Federal Reserve’s measure of inflation.

If PCE is low, expect calls for more economic stimulus which would help mortgage rates to recede.

And, on the government side, the Federal Reserve will hold its scheduled 2-day meeting Tuesday and Wednesday. It’s widely expected that the Fed will lower the Fed Funds Rate by at least 0.250 percent, maybe more.

Often, when the Fed Funds Rate falls, mortgage rates rise in the immediate wake of the announcement. Be aware of this if you are currently floating a mortgage rate.

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