Volatility In The Markets

Mortgage

Mortgage interest rates have become increasingly volatile in May. Money is flowing into the stock market and out of the bond market. When bonds sell off, yields go up. Mortgages usually follow the bond market.

Although recent mortgage interest rates are close to the high water mark for 2013, they are still at very reasonable levels. The best execution for thirty-year fixed rate mortgage has moved from around 3.5 percent to close to 3.75 percent in the middle of May. The volatility is the sharpest the market has seen in several months.

There have been recent articles about the Federal Reserve Bank backing away from quantitate easing programs which include massive purchasing of Treasury Bonds. The obvious concern is that once the Fed stops buying bonds, the price of bonds, which are the foundation for the mortgage markets, would go up in rate. This would translate to still higher interest rates. The housing markets locally, and in some regions nationwide, remain very strong. In these hot markets, listings are selling in 14 days. The strong job market in the Washington metropolitan area is a key driver to home sales.

The effects of the federal sequestration are going to start to filter though the economy. Many government workers from the Park Police to defense workers are feeling it. The math is not hard to understand. If someone is working several fewer hours less a week, they get paid less. This translates to less money they have to spend.

It will be interesting to see the Federal Reserve minutes due to be released in the third week of May. The Fed is likely to show a little disagreement in its ranks. At the same time, the Fed should be reiterating its policy of not raising rates for a couple of years. The nation’s economy is moving forward. Inflation is very low. The world economy has some catching up to do. Job growth is getting better, but there is a long way to go for “full” employment. The GDP is expected to rise less than in previous quarters.

The Congressional Budget office forecasted that the Federal budget deficit will fall to about $642 billion, or 4 percent of the nation’s annual economic output, about $200 billion lower than the agency estimated just three months ago. This is positive for both the economy and the bond market.

The bottom line is this: there will be more volatility in the markets in coming weeks and rates, too, will be volatile. Rates in general are in a good range.

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Wed, 23 Jul 2014 08:20:39 -0400

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