There are so many forces working in opposite directions right now that it is really hard to predict what will happen. Normally one would expect that the bond market would have responded negatively to news this morning that July Industrial Production came in higher than expected (up .2% vs expected 0% increase and last month .5% increase). The stock market took that news as positive and is continuing its move higher. Bond investors appear more focused on the strengthening dollar and the weakening global economy. A stronger dollar makes both US Equities and Fixed Income Securities (Bonds) more attractive to foreign investors. Both stock market and bond market investors are also responding positively to the downward trend of oil prices, but for different reasons. Equity investors see the price of oil coming down as a sign that the US Consumer will have more to spend and which will stimulate more economic activity. Bond investors are focusing on the projection for lower inflation moving forwards as a positive event (inflation eats into the rate of return / yield that investors who purchase bonds earn) and are not building in projections of significant economic growth coming from prices at the pump declining.

Those who follow the market from a technical perspective (statistical charting that predicts tops and bottoms and try to identify when there are trends vs just data anomalies) believe that we may have created a “bottom” in price and “top” in yield at least in the short term. This would mean that we could see rates inch lower. However, these charts do not take into account current events. They are simply computer generated models based on what has occurred in the past.

On a separate front, the spread between 30 year Fannie Mae and Freddie Mac mortgage-backed securities (the financial instruments which determine the rates that you pay) has risen again to over 2% over the 10 Year Treasury vs a more traditional spread of 1.5% to 1.75%. The higher spread is the result of investor fears regarding the capitalization of Fannie and Freddie in the face of declining housing prices in many parts of the country, higher foreclosure rates and increases in the delinquency percentages of “prime” loans. Despite pledges from politicians from both sides of the isle that Fannie and Freddie will not be allowed to fail and the recent bill passed by Congress that allows the US Treasury to buy stock in Fannie and Freddie if required, mortgage-backed security investors appear to still fear that somehow if a worst case scenario materialized and there was a bail out that there would be some form of “hair cut” for them where they might not get paid back the full amount owed to them. It is very possible that once this fear subsides we could see 30 year mortgage rates stay flat even if the 10 Year Treasury yields rise as a result of a rebound in the stock market. Such an event would most likely require signals that the housing crisis is over and that the parts of the county which have been most impacted have turned the corner towards better days which would be marked by stabilization of home prices, lower days of investor and increased sales activity.

All in all, after this morning’s strength in the bond market despite stronger than expected industrial production in July, and assuming the market holds steady for the remainder of the day, I would support cautiously floating your loan to see if rates inch lower. I always feel a bit uncomfortable making recommendations to float because it inherently feels risky to me. However, I also feel uncomfortable if I never give recommendations to float. Also, for borrowers that are pre-approved with Iron Harbor, we are able to “pull the trigger” and get loans locked very quickly when it appears the market is turning the other direction. As such the downside potential of floating is typically limited to the “damage” that might occur overnight which typically would not exceed .25 to .375 points worse pricing than the day before if the market opens worse than the day before.