Tag: bond markets

Mortgage rates haven’t been skyrocketing, by any means, but they have been moving up in fits and starts over the past 2 weeks.  Today was just another page in that story despite a relatively friendly reaction to the Fed Minutes.

What are the Fed Minutes?  Well may you ask!  If you’re familiar with the notion of “meeting minutes,” that’s basically what we’re dealing with.  In the Fed’s case, the minutes offer a robust recap of the discussion that takes place during the Fed policy meetings.  These can be extraordinarily important events for financial markets–especially the bond side of the market (bonds dictate interest rates, including those for mortgages). 

Even though the most recent Fed meeting was 3 weeks ago, traders are nonetheless anxious for any clues about future Fed decisions.  In today’s case, the anxiety played out in the form of bond market weakness ahead of the Minutes (weaker bonds imply higher rates) followed by a recovery after the Minutes proved to be fairly boring.

Mortgage rates experienced an uptick in volatility last week as the broader bond market was hit with a big dose of new supply.  In other words, between a set of scheduled Treasury auctions and a surge in corporate bond issuance, there were lots of new bonds looking for buyers.  More supply means bonds have to offer higher yields (aka “rates”) in order to attract buyers.  Mortgage rates moved higher as a result, but only in the first half of the week.

Once the market worked through the supply, renewed covid fears and geopolitical risks combined to tip the scales back in favor of bond buyers (investors often seek out bonds as a safe haven amid uncertainty and/or economic weakness).  More buyers mean lower rates, all other things being equal.  The good times kept rolling up until Monday morning.  The bond market has leveled off since then, but is doing a fairly good job holding in this lower range.

Mortgage rates bounced at 6 month lows early last week and moved higher at a faster-than-normal pace through the middle of this week. They’ve been slow to recover, but Friday went a long way toward solidifying the short-term ceiling.

Economic data inspired the move on Friday with Consumer Sentiment falling to the lowest levels since 2011, just edging out the lows seen at the start of the pandemic. 

The University of Michigan, which has conducted the survey for decades, called out the “stunning loss of confidence” as being distorted by consumers’ emotional response to the resurgence of the pandemic, ultimately concluding “consumers will again voice more reasonable expectations” in the coming months.

By now, it’s no mystery that mortgage rates are significantly higher than they were last week.  The bigger mystery had to do with what comes next.  In some ways, the recent jump in rates could be viewed as a warning sign about more trouble ahead.  At the very least, it proved that the market was willing to react to various inputs in logical ways.  Last week’s chief example was the strong jobs report which did more than anything to accelerate the move higher in rates.

Through a different lens, we could simply say the market was reacting to the inputs that were available at the time, and that it will continue to do so. That’s a fairly vague assertion, so let’s clarify.  

The key inputs are interdependent to some extent.  It’s very easy to pin rate momentum on changes in bond buying policies from the Federal Reserve.  But the Fed’s decisions on that front will depend on a combination of economic data, inflation expectations, and risks to the outlook.

After hitting 6-month lows early last week, mortgage rates bounced and have been moving higher ever since.  The increases were moderate at first, but the pace quickened after last Friday’s jobs report.  In general, strong economic data is bad for rates.  The jobs report is generally considered to be the most important piece of economic data for rates.  That’s especially true right now as the Fed tries to decide when it will slow the pace of its bond buying program.

The Fed isn’t the only consideration for rates though.  In fact, while the timing is a bit of a moving target, it’s really the underlying economy that stirs the Fed to action.  And as far as the economy is concerned, the state of the pandemic is probably the most important input, but there are others that rival it from time to time.

Rates were excellent at the beginning of the week, but that began to change on Wednesday.  We were already well on our way to 3-week highs on Thursday, and Friday made it official.

Notably, these 3-week highs are still historically low.

Friday’s main source of drama was the strong jobs report from the Labor Department.  The unemployment rate dropped from 5.9% to 5.4%, easily besting expectations of 5.7%.  This was accomplished despite a 0.1% increase in Americans who considered themselves part of the labor force (a statistic that is sometimes used to offset changes in the unemployment rate).  

Mortgage rates moved up from 6-month lows yesterday and that trend continued today.  This time around, we didn’t have any obvious culprits on the economic calendar (econ data played a big role in yesterday’s rate spike).  Instead, the bond market drama played out at a more gradual pace throughout the morning. 

As bonds weaken, mortgage lenders are increasingly compelled to raise rates.  If they weaken enough, lenders can even change rates more than once a day.  This was the case for many lenders on Thursday, but in outright terms, we’re still at better levels than most of the past 6 months.  Apart from the first 3 days of the week, only 1 or 2 other days have been any better going all the way back to early February.

Mortgage rates hit their best levels in 6 months yesterday, but moved higher today following a strong report on the services sector.  

The economy is one of the key inputs for interest rates.  As such, several of the most relevant economic reports have a longstanding history of causing day-to-day volatility.  Today’s ISM Non-Manufacturing Index is one of a handful of the most important reports.  By coming out much stronger than expected, it suggested the economy was closer to a level that would prompt the Fed to make changes to rate-friendly policies.  Bonds reacted with lower prices and higher yields (aka “rates”). 

Of course we’re only talking about only one economic report.  A few short hours earlier, another important report, ADP Employment, missed by a longshot.  A few days ago, ISM’s own manufacturing index suggested the post-covid economic growth was leveling off.  

Mortgage rates moved slightly lower again today–extending a steady string of improvements that began after last week’s Fed announcement.  The average lender is now able to quote conventional 30yr fixed rates that are at least as low as those seen in the middle of July.  In most cases, today’s offerings are slightly better.

The details can vary quite a bit depending on the scenario (purchase/refi, credit, downpayment, etc), but best-case scenarios have been back in the “high 2’s” for weeks.  In almost all cases, today’s rates are the lowest since the beginning of February.

What’s up with the refreshingly strong move back toward all-time lows?  

“Taper talk” refers to comments, speeches, or official policy communications from the Federal Reserve (aka “the Fed”) that speak to the timing and nature of a reduction in the Fed’s bond buying activities.  Wow!  What a boring and potentially confusing sentence!  Let’s try again…

The Fed buys bonds–US Treasuries and mortgage backed bonds (which, in turn, serve as the foundation for mortgage rate pricing).  This helps rates move or remain low.  When markets think the Fed is going to stop buying bonds, rates are at risk of moving higher. 

The current bond buying efforts began as a response to the pandemic.  They helped stabilize the financial system and they provided “accommodation” (a boost to overall economic activity intended to support the Fed’s goals on inflation and job growth).  As the pandemic grew more manageable and especially as the economy has come back online, the Fed has increasingly discussed winding down (or “tapering”) the bond buying programs.