Pay close attention to what Bob Ashby says here:

Mortgage bonds have been rallying since Bhutto was killed yesterday,
all due to uncertainty about who will take control of the nuclear power
there. As is typical with uncertainty, there is a “flight to quality”
which means bonds, including mortgage backed securities, benefit even
when the fundamentals are lacking.

 

Is it madness? Not really, just temporary insanity.

 

 Thursday, I changed my recommendation to float all loans for this reason:

Expect a flight to safety (READ: Treasuries) from riskier assets.
Mortgage bonds should benefit from this flight to safety trend during
the Pakistan situation. This could very well improve mortgage rates in
the near term. Be prepared to act quickly as this volatile situation
changes.

 

What’s wrong here? Most of my readers know that Robert Ashby and I are almost always reading from the same sheet of music. Who’s right?

Both of us are. I said to “be prepared to act quickly”
which means you need to keep checking back. As quickly as rates
improves, they will reverse course and start rising again. It could
happen tomorrow (Dec. 31) or on Wednesday (Jan 2) or soon thereafter.
The anarchy in Pakistan is driving the lower mortgage rates. When
that’s seems stable, it’s time to lock.

Keep checking back.

Mortgage rates in Long Beach are closed for locking. Hence, this report is for tomorrow.

We’re changing our position from lock to float. This may be a short-term opportunity but it is one, nonetheless.

Former Pakistani Prime Minister Benazir Bhutto was gunned down this morning. While nobody has claimed responsibility for the assassination, Bhutto’s supporters are assessing blame on the current leader of Pakistan, General Musharraf. Last month, Bhutto was critical of Musharraf’s suspension of the Pakistani constitution, suspension of the judiciary, and declaration of martial law. Musharraf claimed that he needed to declare martial law to root out the Radical Islamic terrorists in Pakistan.

Governments across the world, including the United States, have been critical of Musharraf’s declaration of martial law. World governments are calling for swift investigations and prosecution of the assassins. There will be an international witch hunt and pressure on Musharraf for a swift response.

In today’s domestic economic news, the durable goods number was much lower than expected and consumer confidence was up…

FORGET ALL OF THAT.

Pakistan is a sovereign state with nuclear weapons. General Musharraf is in a huge pickle and is operating under a microscope. The terrorists smell anarchy, in Pakistan, and operate best under those conditions. If Musharraf pulls a play from the benevolent dictator’s playbook, Bhutto’s supporters, and the international community, will suggest he is covering up his guilt. If he doesn’t declare martial law, terrorism may very well flourish in Pakistan and the international community will be calling for his resignation.

That’s a lot of pressure for a guy with his finger on the Armageddon button.

Expect a flight to safety (READ: Treasuries) from riskier assets. Mortgage bonds should benefit from this flight to safety trend during the Pakistan situation. This could very well improve mortgage rates in the near term. Be prepared to act quickly as this volatile situation changes.

Recommendation Change: Float all mortgage applications.