Mortgage Rates Poised For A Sharp Drop

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Short Covering Setup

  1. Belief in the Trump economy is extremely high.
  2. Treasury Shorts keep piling on even as yields decline.
  3. Those short from 3-4 weeks ago are already underwater.
  4. A very explosive short-covering setup is in play. All it takes is one very bad economic report and yields will plunge.

Treasury Bears Beware: Explosive Short-Covering Rally Coming Up

Treasury Specs Are So Short, It Is Now A 4 Sigma Event

Ongoing Lock/Float Considerations

  • Rates had been trending higher since hitting all-time lows in early July, and exploded higher following the presidential election
  • Some investors are increasingly worried/convinced that the decades-long trend toward lower rates has been permanently reversed, but such a conclusion would require YEARS to truly confirm
  • With the incoming administration’s policies driving a large portion of upward rate momentum, mortgage rates will be hard-pressed to return to pre-election levels until well after Trump takes office.  Rates can move for other reasons, but it would take something big and unexpected for rates to get back to pre-election levels. 
     
  • We’d need to see a sustained push back toward lower rates (something that lasts more than 3 days) before anything less than a cautious, lock-biased approach makes sense for all but the most risk-tolerant borrowers.  The beginning of 2017 may be bringing such a push, but there’s no telling how long it will last.

Excerpt from Mortgage News Daily

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