The insane volatility continues as prices rebound

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“The following information is only believed to be reliable until September 29, 2022. After that, prices could be up or down by as much as 0.25% to 0.50%.”

Every daily price update these days has to come with this kind of disclaimer. We’ve seen some of the biggest day-to-day (and day-to-day) changes since our daily records began in 2009. A drop of more than 0.40% yesterday (in two phases) and a rise of almost 0.20% today.

Most of the recent volatility is a factor in the market panic that began in the UK late last week. The initial reaction was a quick move towards higher interest rates, but when the Bank of England (the UK’s version of the Fed) made an emergency announcement yesterday, rates plummeted…temporarily.

Today then became a day for the underlying bond market to find its new trading range. The Bank of England helped imply a cap on Tuesday’s highs (when mortgage rates peaked at 7%). Today, inflation data from Germany helped to imply a floor of around 6.625% (relative to the average US 30-year fixed mortgage rate). These are not hard and fast limits. They could be challenged at any time depending on the dates or events that draw the market’s attention.

In the week ahead, these events will be more associated with US economic data as several high-profile reports are released. The potential for volatility will be particularly high on October 13 when the next consumer price index (CPI) is released.

A few things to keep in mind until then:

1. There is no way to reliably predict which direction we will go. It’s easier to say that volatility should continue for better or for worse. And it’s probably fair to say that without serious motivation from data (data that would likely take several weeks, if not months, to arrive) rates would have struggled to move any further below the 6.

2. It is still the case that many offers imply a higher than normal upfront cost (aka “points”). In many cases, certain types of transactions may require multiple points in advance. That hasn’t been the case historically and won’t be forever this time, but what makes it go away is simply the process of acclimatization to higher grade rates. In other words, you may choose 6.625% with 1-2 points or 7.125+ with zero points at some point in the near future (assuming today’s prices have remained relatively flat, or at least declined through this area, among other volatility).

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