Bond Yields Fall / Lending Rates Next?

Posted by urbandigs

Fri Jul 20th, 2007 12:31 PM

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A: With disappointing earnings from GOOG, CAT, INTC, and continued uncertainty in the subprime markets, stocks are getting a bit jolted today. Honestly, its completely healthy as the tradable markets have been on a tear for the past few years. You must understand that traders are emotional and react as such! With slumping stocks, there is a flight to quality in the bond market pushing bond prices higher and yields lower (bond prices and yields move in opposite directions). The 10YR bond yield dropped convincingly below that 5% mark today and if it holds, should provide some nice relief to prospective buyers with easing lending rates as we get into next week.

Here is a chart showing you the past 6 months (and the original surge) of the 10YR bond yield but does NOT include todays 8.5 basis point drop (0.85%) so far:



Here is today's drop with 10YR yields currently at 4.94%:



Now, yields are still at a higher trading range from where we were earlier in the year when 10YR yields were around 4.5% or so. This is what comes with volatility and so much uncertainty, however, it doesn't change the fundamental challenge to contain very fast global growth and inflation. Even the fed recently declared that inflation is their #1 concern, reducing expectations of any fed cut.

I still think yields are in a general upwards trend, especially as global central banks raise their rates, so all of these short term moves are really only helpful to discuss for those who:

a) recently signed a contract of sale and are deciding WHEN to lock their rate in

AND

b) very serious prospective buyers with a time pressure to purchase who need to understand where lending rates are headed so that affordability can be analyzed


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UPDATE: 2:09PM EDT - Let's see what happens. According to Michael McGivney of Wells Fargo, a direct lender, here are today's rate quotes for three popular loan products:

JUMBO Loan Rates Quoted At...

30YR Fixed - 6.875%
7YR ARM (principal + interest) - 6.375%
5YR ARM (principal + interest) - 6.125%

*Disclaimer - Rates are subject to change based on loan amount, credit, risk adjusters, and a minor banking relationship with Wells Fargo. All may affect the final rate quote.
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UrbanDigs Says: As 10YR yields drop, a lagging effect will hit the mortgage markets giving you lower offered rates in the days to come. The question you need to look into now if you fit into criteria 'a' as I noted above is, will this dropoff in yields HOLD? If it does, expect better rate quotes early to mid next week for lock-ins. If it doesn't, any relief will be short lived. If yields keep dropping and reach 4.85% or so, wait a bit longer as the lag to hit the mortgage markets will take a few extra days. Stay on top of this & lock in your rate accordingly!