Mortgage Rate Watch
Rates Remain Resilient After Inflation Scare

The 70's and 80's brought unforgettable economic lessons about inflation. Since then, certain market participants have been watching inflation like hawks, even when they didn't need to.

After the start of the pandemic, the massive amount of fiscal stimulus (covid relief bill) and monetary accommodation from the Fed (bond buying and rate cuts) had inflation hawks on high alert.  Fed speakers have been consistent in their response: yes, inflation was likely to spike this spring for a variety of reasons, but it wouldn't necessarily be evidence of a sustainable shift.  

Inflation can be measured in a few ways, but the most basic and most popular is via price indices published by the government.  The Consumer Price Index (CPI) is one of the two dominant forces in that regard and this week brought a fresh update for the month of April.

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Mortgage Rates Are Actually HIGHER This Week

It's Thursday and, thus, time once again to check in with the slew of mortgage rate headlines that typically follow the release of Freddie Mac's weekly mortgage rate survey.  Here are a few choice selections:

"U.S. Mortgage Rates Fall for Second Week"
"Mortgage Rates Continue to Decline"
"30-year mortgage rates fall to 3-month low"

And so on and so on...  The only issue here is that they're all wrong.  Rates aren't lower today, nor are they lower this week, nor are they at the lowest levels in 3 months.  They're actually at their highest levels in several weeks!

You may be wondering who's lying to you at this point, but rest-assured, there is no intentional deception.  Quite simply, my claims above take TODAY'S rates into consideration whereas the more upbeat headlines generally pertain to rates that existed on Monday and Tuesday.  Why is that?:30am. 

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Mortgage Rates Moving Higher After Inflation Data

After bottoming out at 2 month lows late last week, mortgage rates have been heading higher.  At first, the move was relatively gradual, but the pace increased today after a key report on inflation came out much stronger than expected.  Why do rates care about inflation?  Here's a quick explainer for those who need it:

Mortgage rates are primarily determined by trading in the bond market.  After all, bonds are essentially loans where the bond buyer is the lender/investor who fronts a lump sum and earns interest over time.  Because those investors are realizing value based on payments over time, if inflation robs those future dollars of purchasing power, then the investor/lender's decision to buy that bond is less profitable.  If investors have reason to believe inflation will increase (or immediate evidence that it IS increasing), they don't want to pay as much for any given bond as they may have a few days/hours/minutes before. 

Bottom line: inflation erodes the value of bonds, thus forcing investors to compensate by demanding higher rates of return.  That scenario played out immediately in the bond market today with 10yr Treasury yields spiking abruptly in the wake of the inflation report.  Mortgage-backed securities tanked in similar fashion.  But the average mortgage lender didn't raise rates quite as fast as the market movement suggested.  There are a few reasons for that, but timing is the biggest factor.  

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Mortgage Rates Moving Higher Again

Mortgage rates had enjoyed a solid little run for almost all of April and again in the first week of May.  By last Thursday, they were at their lowest levels in more than 2 months in many cases.  Even now, they're still closer to those recent lows than to the highs seen at the end of March, but they're definitely higher.  

Rates are primarily driven by trading levels in the bond market.  Those trading levels take a variety of cues, but one of the most basic is that of "supply and demand."  Econ 101 teaches us that higher supply begets lower prices, all other things being equal.  The same is true for bonds.  This week, supply is surging on several fronts with record sizes for Treasury auctions and several large corporate bond offerings.  While neither of these are the same bonds that most directly influence mortgage rates, they are correlated and interdependent enough that mortgage rates ultimately feel the ill effects of increased supply.

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Rates Reacted to Jobs Report, But Not Like You'd Expect

Once a month, the government releases the Employment Situation, also known as "the jobs report."  No other piece of economic data is as consistently relevant for the bond market and, thus, interest rates. 

For most of the past year, the normal correlation between jobs and rates was on hold.  That makes sense, of course.  Initial lockdowns completely obliterated the labor market and we've been waiting to see how it would recover and how it would be reshaped ever since.

In the past 1-2 months, the bond market has finally shown some willingness to react to economic reports.  Notably, last month's exceptionally strong jobs numbers put obvious upward pressure on rates.  Because of that, anticipation was high for this week's report.

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