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