THE BASIS POINT

Rates Up Third Day. Outlook Before Jobs Report.

Stocks are up (Dow +62, S&P +9) and bonds are down (FNMA 3.5% coupon -20 basis points, 10yr yield 1.96) today as jobless claims were lower a second week and European Central Bank President Jean Claude Trichet offered new support for the debt crisis in Europe: the ECB will buy covered bonds and extend bank loan terms. More on this below, but first the rate recap.

This is the third straight down day for mortgage bonds, and they’re clinging to the 25 day moving average with more room to drop if they definitively break below this support level today or tomorrow. Rates rise when bond prices drop like this, and rates are up .125% from Monday. Not bad considering three days of mortgage bond losses. It will all come down to tomorrow’s jobs report.

Expectations are for +60k new nonfarm payrolls created in September following zero created in August. Stock and bond markets won’t have major conviction until they see this number. If it’s higher than expected, rates would rise further as bonds sold and stocks would rally more. And it’s reasonable to expect a better figure than August because that report was skewed by the Verizon strike which subtracted 45k workers from the count that will be added back in this month.

Even if rates do rise again tomorrow, rates don’t have strong justification to move sharply higher medium term.

Bloomberg’s market recap this morning opens with some very clever wording:

U.S. stocks rose for a third day and Treasuries retreated as investors dissected the European Central Bank’s plans to tame the sovereign debt crisis.

“Plans to tame” are the operative words. This stock and bond volatility won’t stop for particularly this reason. Politicians cannot completely solve this situation, they can only hope to tame it. Plus Europe’s leadership is as politicized if not more than ours, so their ability to make bold moves continues to underwhelm markets.

That’s why there’s no conviction either way, and rates swing up and down. But it’s realistic rate lows touched post September 21 Fed meeting will return at certain, albeit short, market intervals. They’re here and gone in minutes, so mortgage consumers must be ready to make decisions quickly or they will lose their window.

Here’s how to shop for a mortgage amidst this volatility.

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