WeeklyBasis 2/5/2011: About That Refi Boom

Rates rose .375% last week, which means $116 more per month on a $500,000 loan. Below is a brief explanation of why this happened and what to expect next week.

Let’s back up to Friday, January 28 to explain why rates spiked. That day, GDP showed the economy grew 3.2% in 4Q2010, a nice improvement over 3Q2010’s 2.6% reading. Rates would normally rise on data like this but protestors in Egypt were throwing Molotov cocktails and calling for their president to step down. So mortgage bonds were a safe bet, they rallied, and rates dropped.

But when markets opened again Monday, bond investors mostly shook off Egyptian turmoil—it’s just democracy, nothing to be afraid of, right?!—and re-focused on the data: consumer spending the fastest since early-2006 and double the 2010 average for the first three quarters. And one manufacturing survey after another last week showed increasing activity, and increasing inflation. Bond investors hate inflation because it erodes the purchasing power of the future payments they get on those bonds. So they sell bonds on inflation news, which pushes rates higher.

Bond investors also took Friday’s jobs report as good news which caused more selling (and rate increases): unemployment dropped from 9.4% to 9% while only 36,000 new jobs were created.

Next week is relatively light on data. Rates face more upside risk with $72 billion in new Treasury bond supply that sometimes competes with mortgage bonds for buyers. Auctions as follows: $32b in 3yr notes Tuesday, $24b in 10yr notes Wednesday, and $16 in 30yr bonds Thursday. And Tuesday we have another less-known jobs report (the Job Openings & Labor Turnover Survey) that will be more closely watched this week to get some clarity on jobs following Friday’s confusion.

If anyone is gasping that rates are “all the way” up to 5.125% on better economic data, remember that rates were 6.7% in July 2007, just before the big economic crash.

CONFORMING RATES ($200,000 to $417,000) 0 POINT
30 Year: 5.125% (5.24% APR)
FHA 30 Year: 4.75% (4.87% APR)
5/1 ARM: 3.625% (3.74% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) 0 POINT
30 Year: 5.375% (5.49% APR)
FHA 30 Year: 5.0% (5.12% APR)
5/1 ARM: 3.875% (3.99% APR)

JUMBO RATES ($729,751 to $2,00,000) 1 POINT
30 Year: 5.375% (5.49% APR)
5/1 ARM: 4.25% (4.36% APR)