How Do You Lock When Rates Swing .5% Per Day?

After Google reported first quarter earnings growth of 42% yesterday, Google shares soared $89 or 20% today to $539.41, and helped push the Nasdaq up by 61 points and the Dow by 229 points.

Meanwhile bonds went on a wild ride with mortgage bond prices trading in an 99 basis point range on the day. This kind of swing translates into about 50 basis points (or .5%) in consumer mortgage rates—on a $600,000 mortgage, this is $250 per month. This is insane. Even more insane than a $90 one-day stock price swing. Markets reacting to data in this manner suggests two things: markets are still extremely dislocated, and there is plenty of liquidity out there somewhere searching for a home. Big nervousness and big volume means one thing: volatility. So how do consumers plan a rate lock strategy amidst all this volatility? After all locking a mortgage rate you’re sticking with for at least five years is much different than trading the ups and downs of Google on a daily basis. Or is it?

Normally, mortgage rates would fluctuate about .25% within a given trading week, but since August, and especially since January, these .5% one-day rate swings have become commonplace. In any market, rate lock strategy has two inputs: macroeconomic analysis to understand the intermediate-term (2-6 month) outlook, and technical analysis to understand trading patterns of bond yields that affect rates. Historically, the analysis was always weighted on the macroeconomic side.

So for example, with Google leading the way on stronger overall earnings, bond prices dropped about 68 basis points this morning in a drastic selloff, sending yields (and rates) higher. Corporate earnings to provide some longer-term macro guidance about the prospects for an improving economy, but bond traders take it to the extreme in this market.

Then later in the morning, Philadelphia Fed President and voting FOMC member Charles Plosser warned against relying on Fed rate cuts as the market panacea. Again, this is absolutely true and something markets know is a three to 12 month macro factor, but in a credit crunch-damaged market mindset, bond traders react feverishly and bonds rallied from being down 68 basis points to ending the day up 31 basis points.

Most lenders released three rate sheets today, and the second rate sheets were down .25% and the day ultimately ended up about .25%. To be clear, the 68bp bond price drop produced a .25% average rate hike then the 99bp bond price increase produced a .5% average rate drop. So, on the day, we were better by about .25%, but with a .5% swing.

As a consumer, it’s easy to look at that after the fact and say: “OK well we’ll just lock tomorrow,” or “Great, we’re down, let’s lock.” But what if you’re looking at it when you’re plummeting .25% from the quote your mortgage planner gave you the day before? And you don’t know how bad it’s going to get? It means stomach aches and headaches. There is simply no way to be certain of rate levels in this environment, and the only thing that is certain is that Monday and the next several Mondays after that will show us more of the same volatility.

So the answer is to do what professional investors and traders do: set a price target. Or more specifically: set a rate target. Any good mortgage advisor should be able to use macroeconomic analysis and technical trading analysis to help you set this target (and by way, if your mortgage advisor is talking to you about 10-yr Treasury prices and yields, beware of their advice: they’re not even following the right data.). Set your rate target as you enter the process for a home purchase or refinance, and if the market shows it to you, take it and move on with your life.

If you troll for tiny rate increments in this market, you’re very likely to get burned by the volatility. If your risk tolerance is sufficient you can also set a rage range target to give you some play. But the same principle applies: set your target rate range … and lock when you hit a rate within that range. In an extremely complicated market, it’s just that simple.