August 15, 2023 – Rate Commentary

• August 15, 2023
• realestatelife
• Business & Markets, Fed, Interest Rates, Politics & Economy, Rates, Real Estate, Real Estate Finance, Recession, World News, Your Real Estate Life

Rate sheets this morning should be similar to yesterday as bonds gain back lost ground from earlier this morning. Reprice risk on the day is moderate, we could see more volatility and if bonds do lose ground lenders may be quick to consider repricing worse. The outlook remains that rates are close to peaking, but do have room to creep up a bit further and reach new highs for the year. There is no reason to believe rates will move much lower from here in the near term, and now that both the 10yr Treasury yield and mortgage bond prices have broken technical support levels into a new range, my advice is to lock most of the pipeline for protection after seeing how the day plays out. I’d only consider floating loans with more time until closing, who can wait out this cycle until rates improve a bit again.

Retail sales data this morning showed consumers are still out there spending money and that any talk of a recession is balderdash. Despite the highest rates in over a decade we still see a strong labor market with rising wages and a resilient economy. However, a lot of that money is borrowed, with consumer debt back to an all time high. As long as the jobs and the credit doesn’t crash the economy should continue to do ok.

Talk about the Fed is now shifting from how high interest rates will need to go to how long they will stay where they are at. There is still a chance we could see one more Fed rate hike by the end of the year, with markets pricing in about a 30% chance it happens in November. Looking further out though, rates are forecast to start dropping in May 2024.

Cautiously float all loans, and let’s see how the day goes, but consider locking near term and risk averse at the first sign of trouble or by day’s end. Mortgage bonds currently just slightly in positive territory, but the trend is still that bonds will move lower and rates will move higher. With little hope of seeing a significant move lower in rates, locking for protection makes sense, even at these elevated rates.

Technicals:

The UMBS 5.5 coupon (MBS or mortgage backed securities) at 98.11, +8bps on the day. However, bonds broke the 99.23 support level yesterday and have room to move lower.

The 10yr Treasury yield at 4.18, down a bit from the 4.27 high we saw this morning.