Wednesday saw one of the most pronounced selling days in recent MBS history and the average mortgage rate moved above the highest seen in 2013; rates haven't been this high since May 22nd of 2012.
The jump came after Bernanke stated the Fed was ready to taper their monthly bond purchase program during his Wednesday testimony before Congress. Shortly afterward, MBS sold off dramatically, pushing up mortgage rates, although the 30-year best-execution remained around 3.75%
MBS continued their sell-off on Thursday in reaction to some better-than-expected economic news, said Bryan McNee, a senior bond analyst with MBS Authority. He reported that the market is in for a bumpy ride for the remainder of 2013.
“We believe that we will continue to see increased pressure on mortgage rates throughout the year as we continue to see improvements in the labor market, housing market and overall economy,” McNee said.
Originators have supported locking rates since early May or warned floating borrowers that they can now expect a different rate come closing time.
“It’s gotten pretty bad,” said Rey Gallegos, a retail sales branch manager with W.J. Bradley. “It wasn’t a great week and we are just going to roll with the punches.”
Initial jobless claims were less than expected, a positive for the job market and therefore negative for long-term bonds such as MBS. New home sales were higher than expected and continued to show both growth and strength in housing market.
On Friday, durable goods orders were also much stronger than expected. Normally a beat like this would crush MBS and worsen mortgage rates further, and by 12pm EST, MBS did start to sell off again, losing -13BPS from Thursday's close. The sell-off would have been even greater and put even more pressure on mortgage rates, but bonds typically do well going into a long weekend as investors park their funds into the protected waters of bond land, McNee said.
It's important to remember that fixed-income investors that have been sidelined by the Fed will re-enter the market to buy bonds as interest rates start to rise, according to Gregory Reiter, managing director of Residential Mortgage Research for Wells Fargo. Higher rates won’t necessarily translate fully to the consumer, either, Reiter said. In order to stay competitive, originators may be more willing to accept lower spreads and absorb rate increases to keep operations going.
Bonds and rates will likely remain under pressure next week after traders return to work on Tuesday.