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Interest Rates: Lock It Down

August 19, 2013

It seems like it’s been a long time since rates were at their historic lows, at about 3.375%, but that was just back in early May.  The month of May was an orderly grind higher in rate as the MBS market became concerned with the improving pace of the economy and, at the time, an apparent improvement in the employment picture as well.  Then Bernanke dropped the QE “tapering” bombshell on May 22 and within a few days rates were up to 4.000% and climbing.

During June, especially with the release of the FOMC meeting minutes that reinforced the idea of tapering (which means the Fed will reduce the amount of their monthly MBS purchases) could begin in 2013, rates jumped up to 4.625%.  So we covered 1.250% in rate hike in about a month and a half, that’s a lot of movement in such a short time period.  In addition to this negative trend, there were more days when rates moved up and down in large degree during the day, increased “volatility”.  And the refinance market came to a screeching halt.

After a brief spike higher in the days after the June Employment report on July 5th, Bernanke and other Fed Governors worked the press to put a cap on the rate increase.  That worked, even so that we’ve worked our way back down to around the 4.500% to 4.375% area.

At this point now new economic data remains flat to modestly improving.  The employment picture has softened some, but not enough to change forecasts of the economy picking up steam for the remainder of 2013.  The MBS market seems to be content that current rate levels are high enough relative to the risk of the Fed tapering as early as September.  But this is not an easy truce, volatility remains elevated (immediate price changes are common) and the major economic releases, Employment, GDP and inflation measures are all market moving events.

The next Fed meeting is September 18
th and President Obama will be announcing a replacement for Bernanke in the fall.  It’s hard to see any change in the level volatility before then.

The lesson here for consumers is to not play around with rate locking.  Gamblers in Vegas try to count cards, but there’s no way to count the deck in a game of high volatility MBS, there’s way too many cards in that deck.  Consumers need to know that once they are approved and have a rate they need to move forward and lock it to ensure a good interest rate for their loan.

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