What's Going On With Mortgage Rates?

Post date: Nov 19, 2010 8:30:26 PM

After reaching the lowest levels in decades, mortgage rates have shot higher over the past two weeks. There is not a simple explanation for why this happened, but looking at the many factors which are influencing mortgage rates right now will help to understand what's going on. In short, when investors look ahead, they see few reasons for mortgage rates to move lower and many possible causes for them to move higher. The major negatives for mortgage rates include stronger than expected economic growth, domestic and foreign opposition to quantitative easing, and concerns about lower foreign demand for US securities.

Beginning in late August, the Fed hinted that they would initiate a new stimulus program to purchase Treasury securities, which is known as quantitative easing. In the short-term, Treasury buying by the Fed increases demand for bonds, including mortgage-backed securities (MBS). In anticipation of this added demand, investors purchased MBS, which pushed mortgage rates lower.

After the Fed's official announcement on November 3, mortgage rates began to move higher for a variety of reasons. Stronger than expected economic data caused investors to raise their outlook for economic growth, which generally leads to higher inflation. In addition, there was substantial opposition to the quantitative easing program from other countries and from many US politicians and economists, meaning that the Fed will face strong resistance to an expansion of the program. Investors had viewed the $600 billion initial level as a first step which would likely be increased in the future. Stronger economic growth and opposition to quantitative easing has reduced the likelihood that the program will be increased.

The recent news has not been uniformly negative for mortgage rates. Current inflation levels remain extremely low. In fact, the Consumer Price Index data released this week showed that annual core inflation dropped to a record low in October. Bottom line, though, when mortgage rates reached such extremely low levels, it left them in a position to reverse direction very quickly.

Also Notable:

The Jobless Claims four-week average declined to the lowest level since Sept. 2008
Bernanke testified that the $600B quantitative easing could create 700K jobs over two years
The Treasury will auction $99 billion in 2-yr, 5-yr, and 7-yr securities next week
Oil prices dropped 6% from the high for the year reached last week

Week Ahead

Due to the Thanksgiving holiday, all of next week's economic reports will come out before Thursday. Revisions to third quarter GDP and Existing Home Sales will be released on Tuesday. Durable Orders, New Home Sales, Personal Income, Consumer Sentiment, and the Fed Minutes from the November 3 meeting will come out on Wednesday. There will be Treasury auctions on Monday, Tuesday, and Wednesday. Mortgage markets will be closed on Thursday and will close early on Friday.