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September 18, 2023 – Rate Commentary

Rate sheets will be at least slightly worse this morning, unless we see a reversal for mortgage bonds from early losses due to overnight trading. Reprice risk on the day is low, other than the handful of wholesale lenders who reprice when a mouse farts, most lenders won’t see bonds move enough to have to worry about. Other than some housing data, nothing on the calendar to worry about today or tomorrow. That doesn’t point to any improvements though, and the outlook is still that rates will remain at the same levels or move higher. Any improvements will be small and short lived. I’m not even suggesting to float into the Fed meeting like I usually do.

This week all talk will circle around the Fed’s meeting on Wednesday, which includes an updated dot plot and Fed Chair Jerome Powell’s press conference. On Thursday we’ll also see some early moves in bonds when the Bank of England meets, but that isn’t something we really need to make any adjustments for. We are also starting to see the usual government shutdown headlines, but that won’t affect mortgage rates this week.

You know how 4-out-of-5 dentists recommend that toothpaste? Well, apparently there is a rogue economist out there somewhere thinking the Fed is going to raise its policy rate at this week’s meeting… but the other 99% say we will see no hike on Wednesday. Many consider this to be a “hawkish skip” like we saw in June, and that we will likely see another hike to come as early as November. The probability of a November hike though is down to about 30%, and as that number grows it will pressure mortgage rates higher. I’m guessing that after the Fed meeting we will see that number rise, and it will continue higher as we get the October labor data and CPI inflation data.

Loans closing in less than 15 days should strongly consider locking. Although it is possible we may see some kind of improvement on Wednesday, it’s not worth the risk of volatility for the small potential improvement we would see. We are definitely not in an improving rate environment and want to be careful.

Loans closing in 15-30 days should also consider locking. Even if we see markets react to the Fed with a mini rally, rates aren’t going to drop much. However, it is likely that we turn the corner into October with higher rates than we see today. When there is this much risk versus the low potential for reward, it’s really not worth floating.

Loans closing in 30+ days have the least urgency to lock (but should still consider locking). Like I said above, I don’t think that the Fed meeting is going to help much, but the opportunity is there for those that want to wait and see. However, I went back and looked at the last few meetings, and rates have moved higher afterwards each time. I think that is also likely to happen at this meeting.

Technicals:

The UMBS 6.0 coupon is at 99.53, and although mortgage bonds have improved a little bit since the worst levels of the day, they are still down -17bps. 

The 10yr Treasury yield at 4.36, currently breaking through the important 4.34 ceiling we’ve seen get tested and hold up recently. We may see the 10yr drop back to end the day at the 4.34 level and that wouldn’t surprise me, but I feel like we have seen some warnings that new higher rates are possible.