Calm Before the Storm

Summer isn't officially over, but once Labor Day passes, for all practical purposes it is for most of us.

Now that we are back to work with no sight of a respite in the immediate future, we expect market activity to pick up. It's worth noting mortgage market activity (buying and selling of mortgage-backed securities) has picked up, and rates have become a bit bouncy over the past couple days.

Trader activity has surely picked up. To wit: Stocks rallied and bonds sold off on speculation that Russia and Ukraine might hash out a ceasefire. The headline was pure manna from heaven for bond and stock traders, who were given a reason to buy stocks and sell bonds.

But once the euphoria passed, stocks sold off and bond yields rallied.

The fact is that we remain in a fundamentally low-inflation environment, which is why interest rates in general, and mortgage rates in particular, continue to trade at 2014 lows. At the same time, and somewhat paradoxically, the economy appears to be growing at a brisk pace – one that has been creating 200,000-or-more new jobs per month for most of the year. We say “paradoxically” because when economic growth and job growth take flight, so, too, do interest rates. But not this time around.

That said, we expect interest-rate volatility to pick up. We say that because the languid days of summer are over, and that means more people are watching the market and offering their opinion – either through spoken or written words or direct buying and selling.

Nevertheless, we don't think we'll see a trend toward higher interest rates to materialize this year. Mortgage rates might be more volatile, but they'll likely be more volatile within this low range.

Going forward, the Federal Reserve will remain key. We expect rates won't ratchet higher with any fortitude until the Fed decides to raise the influential federal funds rate – the rate banks lend short-term to each other. When that occurs, rates will likely begin to take flight.

But we prognosticate with one caveat: Don't discount the ability of a strong jobs report or unexpectedly stout gross domestic product numbers to get mortgage rates moving higher. What has worked in the past may not be working at the present, but that doesn't mean it won't work again in the future.

Information provided by Jessica Regan.

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