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September 13, 1996
Mortgage rates have fallen almost a quarter percent in 48 hours, now down to 8.375% at "zero and zero," and 30-year T-bond yields have dropped under 7.00%.
Producer prices rose .3% in August, but the core rate rose only .1%, and CPI put in the same, negligible gain. The big stress-reliever was August retail sales, up only .2%, hardly a dangerous acceleration from July's .1% gain.
The Fed may tighten at its meeting on September 24, and it may not. Disregard the tub-thumping in the press: neither outcome will matter a whit to the bond market. A .25% move has been built into the market for months.
Since March 8, 30-year mortgage rates have held within a broad but well-defined range: never lower than 8.125%, never higher than 8.75%.
There are a few useful rules for range-trading.
The longer a range persists, the less reason for a comfortable, placid, overconfident herd to break out, and the bigger the stampede when it finally does.
The wider the range, the longer it lasts: the herd has lots of room to wander around without breaking fences. At a .625% spread, this 1996 range is quite wide; a .25% range doesn't last nearly so long.
Given this week's slightly softer economic data, there isn't the slightest sign of an event which would spook the herd in either direction.
When the market is stuck in one of these persistent, Texas-sized ranges, and you are trying to price a loan, there are two reasonable strategies. The first is to acknowledge that you are in a random situation, throw your dart the instant you go under contract, and avoid newspapers until you close.
The second is for members of the herd with a gambling frame of mind -- though "gambling" may be too strong a word. "Greener Grass" is a more descriptive handle.
In the six month life of this range, rates have hit the top four separate times, and caromed off the bottom twice. There have been five other low spots, but not quite all the way to the bottom. Greener Grass says whenever rates are near the top, wait to lock, because the herd will soon start to wander from one fence all the way back to the other.
Contrariwise, whenever rates are near -- let alone at -- the bottom, lock immediately. You are gambling, of course, but the odds are upwards of 4:1 your way.
A Greener Grass footnote. If the bottom is clearly defined at 8.125%, don't ever, ever, ever, ever tell your lender to wait for 8.00% to lock. Such a strategy is worthy only ofŠ well, a cow.
"Gee, Fred, why do you suppose they want us to get on that nice truck over there? I bet they're going to take us to some nifty new pastureŠ."
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