End-of-Day, Wednesday, December 13, 2017

As expected, the Fed pushed the target federal funds rate range up +0.25% to 1.25% to 1.50%. More importantly in some respects, the 2018 GDP growth forecast increased and the expectation for unemployment decreased. The median path of forecasts still looks like three rate hikes in 2018.

So with all of that, equities and bonds both rallied big after the announcement. The 10-year fell to 2.34%. Mortgages rallied +31 bps from this morning's levels. Equity investors saw the improved GDP and unemployment forecasts as signals that strong economic is still in the cards. Bond investors saw the committee sticking with three rate hikes next year as a signal that while economic growth is strong, it's still not enough for the FOMC to get too aggressive with the rate path just yet.

Mid-Day, Wednesday, December 13, 2017

In just a few hours, the FOMC is expected to announce a highly anticipated increase in interest rates. Couple that with the Alabama Senate election results from last night and financials markets are a little skittish this morning. Equities are higher but more importantly bond yields are also down. The 10-year is now at 2.37% off from yesterday's closing levels at 2.40%. Mortgage prices are up as well, +8 bps now.

Aside from the FOMC today, core CPI this morning was a little disappointing as the price index was up +0.12% last month and +1.7% year-over-year. Rate sheets should hold steady as we head into the afternoon. Assuming the FOMC delivers on the markets expectations, prices will not likely be impacted by the announcement but analysts will be watching very closely for any signals about rate hikes in 2018. If there are surprises in those indications, MBS could go either direction.

Tuesday, December 12, 2017

What's going on and why does it matter?

Mortgage bonds are now trading firmly below their 200-day moving average as the bond market finally seems to be coming to terms with the increased risk of higher interest rates. The producer price index (PPI) came out this morning hotter than market expectations, showing that wholesale inflation has posted the largest annual gain in six years.  This increases the chances of more Fed rate hikes going into 2018. The Fed is scheduled to issue their monetary policy statement tomorrow, and the market will be focused on the "dot plot" whereby various Fed policymakers indicate their individual estimates for the future direction of interest rates. The Fed is scheduled to purchase up to $1.51 billion of 30-year conventional mortgage bonds today, but they won't be buying any mortgage bonds tomorrow due to their meeting.

What should you do about it?

Lock your rate to be safe.