Tag: Interest Rates

After a sharp increase to start the year and significant improvements between April and mid July, mortgage rates have been fairly flat for more than a month.  That’s definitely not a bad thing considering how close they are to all-time lows with best-case 30yr fixed scenarios still under 3.0%.

Change is coming though, for better or worse.  Rates could actually move lower, but not for reasons that we’d like to see.  Any significant move lower in rate would require a deterioration of “the outlook”–a term that’s intentionally ambiguous here as it encompasses the outlooks for covid, the economy, and Fed policy.

It will take time to get a clearer read on the covid outlook given the inception of a new school year.  It will therefore also take time to understand how economic momentum is affected by the covid outlook.  If that’s not already enough interdependence, there’s the issue of potential labor market shifts due to the new school year (the theory is that a meaningful number of workers may return to the labor force as their children are back to in-person school for the first time in more than a year).  And of course those labor market dominoes depend on schools remaining open despite covid spreading at a record pace in some states.

Mortgage rates are only adjusted once per day by default.  From there, the underlying bond market would need to improve or deteriorate by a certain amount for the average lender to go to the trouble of a mid-day reprice.  A small handful of lenders did that last Friday (bonds were deteriorating), but the losses were small enough to avoid forcing most lenders’ hands.  

By abstaining on Friday, the average lender was forced to adjust today’s rates slightly higher to account for the bond market weakness.  In other words, this morning’s rates were higher than Friday morning’s.  

As the day progressed, mortgage bonds improved enough for a friendly mid-day reprice.  A majority of lenders pulled the trigger, thus helping rates close the gap with Friday’s rates.  Simply put, rates started the day moderately higher versus Friday morning, but are now only marginally higher (assuming the lender in question offered a mid-day price improvement). 

Rates are on hold until the next chapter is written in the complex saga of covid versus the market. This isn’t to say rates perfectly flat–simply that the prevailing momentum has been sideways for the past few weeks. 

Since mortgage rates only change once or twice a day, we can use 10yr Treasury yields to see finer detail.  This entire week took place in the fairly narrow range of 1.29 to 1.21, and it ended with yields precisely in the middle at 1.25%.

What’s the point?  Bonds (and thus “rates”) are muddling through a period of indecision as they wait for clarity.  Bonds ultimately care most about things like the economy and Fed policy.  In turn, the economy and the Fed have a lot riding on the covid outlook. 

The burning question: Will the delta surge do even a fraction of the damage to the economy seen during the initial covid surge?  

Mortgage rates were slightly lower today as the bond market improved for the 2nd straight day.  When bonds prices move higher, bond yields (or rates) move lower, all other things being equal.  In the current case, bonds were generally cautious heading into yesterday’s reading of the minutes from the most recent Fed meeting (read more), but have been bouncing back ever since.  

All that having been said, the movement has been fairly gradual.  The average mortgage borrower may not even see any different between yesterday and today’s rates.  That’s because mortgage lenders typically offer rates in 0.125% increments, and it takes quite a bit more movement in the bond market for rates to change that much. 

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.