This morning, the entire Bond market, including Mortgage Bonds, are contending with the "I" word...inflation. It may sounds a bit odd, however the traders in the pits have recently been talking about Obama's stimulus and rescue packages and the reemergence of inflation should they have a positive effect on the economy.
To add to the trader chatter, this morning Fed member Frederic Mishkin was on CNBC saying that "inflation could come to the forefront given all of the government programs". He went on to say that "once the economy recovers, liquidity must be taken out of the markets" - this means the Fed may need to hike rates down the road.
As I've been reporting and recent reports have been confirming there isn't even a hint of inflation at this time - however, traders are looking into the future and taking positions on where they see things headed. Just the chatter of inflation is putting pressure on bond prices. Any spike in inflation may make it difficult for the Fed to drive mortgage rates lower through their purchase program.
As you can see from the candlestick chart, we've had many consecutive days of price deterioration in Mortgage Backed Securities. Prices have just broken below the Rising Trendline...not a good sign. If prices break below yesterday's low, it will be a time to lock for technical reasons as further price erosion will be likely.
The Fed still has $450B in buying power to deliver the market, and this could help pricing improve, thus improve home loan rates.
Rates continue to be very attractive and people would be wise to get their application submitted and at the ready because as we have seen recently, the good pricing can get away from us rather quickly.