Mortgage Rate Forecast – May 4, 2011

Locking Stance:  CAUTIOUSLY FLOATING      Mortgage Bonds:  +16bp

First off, my apologies for my “absence” across the spectrum.  I picked up a flight to Madrid, Spain over the weekend, which prevented Monday’s normal routine and yesterday I was building a new computer to replace my old desktop.  That, of course, took much longer than originally planned and I ended up installing every program (still am) from scratch on a new drive.  Nevertheless, I have kept abreast of what is happening in the markets and I have yet to change stances, so you really did not miss much except for me blabbing on about Osama bin Laden’s death and how it really doesn’t matter in the mortgage backed securities market.  Reality is overwhelming!

This week is all about jobs in essence, so let’s get into the data today.  Purchase Applications rose a scant 0.3% while Refinance Applications were up 6.0%, according to this week’s MBA Purchase Applications.  That translates to all being quiet still on the housing front.  The ADP Employment Report, that “forecaster” of Friday’s Jobs Jamboree, showed a slowing in growth of Private Payrolls, reporting 179,000.  That may very well drop estimates for Friday’s Jobs Report.  And then there is more disappointment in the form of a miss by the ISM Services Index, coming in at 52.8 versus the 57.0 expected.  That, along with some disappointments (though not as bad) overseas is triggering more stock sell offs and that drives money into MBS.

A quick look at the charts shows 13 straight green candles, breaking through resistance level after resistance level.  However, the “rubber band” can only stretch so much before it snaps back (corrective move), and stochastics are showing that being overdue.  We may make it all the way up to the 200-day moving average, but without a solid retracement for quite sometime, this snapback could be fairly significant.  The risk/reward ratio is about even right now, so make sure you remain ready to lock at a moment’s notice if you are floating still.

What does this mean for Mortgage Rates? Mortgage rates are edging lower still, but that trend may be coming to an end, at least briefly, in the near future.  Floating, with extreme caution, is still a viable play, but be ready to lock quickly when the correction begins, which could be coming quickly, or lurking in the not-to-distant future.

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