Side Note - Interest Rate's & China
A: For all you who signed a contract of sale in the past week or so, or are about to, keep a close eye on US equities in their response to the China selloff. Should US stocks fall but then rally as buyers step in for discounts, then rates will hover around where they are now. But if US equities get hit hard (with a selloff, then small rally, then another selloff towards the close) today and in the next day or two, the 10YR bond yield will fall and provide some relief in Mortgage rates; telling you to hold off for a week or so to lock in your rate. Here's the skinny.
10YR Bond yield fell 3 basis points to 4.851% from a previous close of 4.882% yesterday. The relationship is that of a see-saw. As stocks fall bond prices rise (yields fall). As stocks rise bond prices fall (yields rise). Mortgage rates tend to follow the action on the 10YR bond yield which is why I'm trying to ingrain this train of thought into your heads.
Use this model as a guide if you recently signed a contract of sale and are considering when to lock in your interest rate.
STOCKS FALL / CHINA SELLOFF STICKS --> Hold off locking in your rate as the 10YR bond yield will drop more the harder US equities fall
STOCKS REBOUND / RALLY HOLDS --> Still no rush. If you didn't lock in a rate on May 17th when I said to, then the damage is already done and short term trend might be in your favor right now. Worst case, rates should hover where they are now or drop very slightly in response to China selloff. I'll report to you if this changes.
The bond market is still not predicting a hard landing (if it was rates would be heading lower; but the trend has been higher). In fact, I'm surprised of the muted reaction thus far in US equities and bond yields. Lets see if it holds.
Comments (3)
My wife and I locked in a 30-yr fixed jumbo at 6.375% last Friday, May 25. I probably could have gotten it for a quarter of a percentage point less if I locked in on the 17th as you advised, but the timing was not right. Anyway, the bank gave us an option to pay $500 extra for a one-time float-down, but we waived that option figuring that rates would only continue to climb. Hopefully that will be the case, because if rates drop, then I will be upset I didn't spend the $500.
Posted by Kenneth | May 30, 2007 12:39 PM
That seesaw picture is entirely wrong, and isn't even consistent with your written description above: "As stocks fall bond prices rise (yields fall). As stocks rise bond prices fall (yields rise)."
Posted by John | May 30, 2007 5:39 PM
ugh John your right..I meant bond prices fall, not yields..
I'll correct the image now and thanks for pointing out.
Thanks
Posted by Noah | May 30, 2007 7:05 PM