mortgage interest rate It rose slightly today, but only after a slight drop earlier this morning.
“Higher” and “Lower” are more informative when you’re dealing with a well-defined starting point, so let’s get to it! , fell very slightly on initial rates announced Monday morning. Prior to June, we had to go back to 2008 to see higher rates.
The slight improvement we saw this morning was “great” but no reason to celebrate. However, the improvement did not last long. The underlying bond market (which drives interest rates) began to fall after the scheduled auction of his 10-year Treasury bill.
10-year government bonds don’t directly determine mortgage rates, but rapid movements in 10-year bonds tend to affect bonds that specifically determine mortgage rates. Correlation can be stronger or weaker from day to day. Mortgage-backed bonds actually did a little better today, but that’s really just a warning-setting anecdote.
The average mortgage isn’t expected to last 10 years now, so the 10-year Treasury was worse than today’s mortgage bonds. In other words, if you had to choose a US Treasury to emulate a mortgage bond in terms of lifespan, a 5 or 7 year bond would be a much better choice (some say 3 years). maybe, but that depends on what happens in due time). specific method for the next two years).
why is that important? It all comes down to Fed policy. Bonds are interest rates and interest rates are bonds. If a 10-year Treasury bond requires investors to lock in a 10-year rate of return, and the average mortgage bond requires investors to expect about half of that time frame, the fed fund rate will rise 24 hours a day. Indeed, the longer the market expects the Fed’s rate to remain constant, the more likely that 24-hour timeframe will actually be a few years. there is. future.
Because of that uncertainty, the Fed’s funding rate (which the Fed actually has the power to “raise” or “lower”) falls at the shortest end of the lifespan spectrum. Or “time period” is an important consideration for traders. You may have heard of the inverted yield curve over the past year. That’s when longer duration bonds offer lower returns than shorter lifespan bonds.
Think about it. If you’re an investor looking to buy a bond to secure a guaranteed rate of return, why buy money at an interest rate of 3.35% for 10 years when it’s only tied up for 2 years and yields only a 3.57% return? The actual numbers for today, by the way. The oversimplified answer is don’t! Not as long as you know you can lend money at 3.57% every two years for the next 10 years.
But there’s no way of knowing if the 2-year interest rate will stay high again and again every time you need to reinvest. If 10-year yields are currently low, it’s the market’s view that short-term rates won’t stay high for his decade. However, the Fed’s anti-inflation efforts are now putting a great deal of upward pressure on short-term rates.
How is the Federal Reserve Fighting Inflation? There are several tools, but the main strategy is to raise the Fed Funds Rate. This results in a higher cost of capital and a slower flow of credit to businesses and consumers. The hope is to push “demand” down, which should put downward pressure on prices (aka “supply”).
So what’s the warning on mortgage rates? Simply put, we have an important inflation report tomorrow and additional economic data throughout the week. The Fed will consider that data when deciding how much to raise the Fed Funds Rate next Wednesday. If inflation is higher than expected and the data is strong, the market will increasingly expect the Fed to revise its rate hike outlook even higher than it currently is. And since the bonds underlying mortgages now have more in common with the shortest interest rates, mortgage rates would be worse than 10-year Treasuries.
Bottom line: higher Fed rate expectations = more upward pressure on short-term rates compared to long-term rates, and mortgages are shorter-term than 10-year Treasuries. This reverse principle is why today’s bad 10-year Treasury bond auction didn’t have such a negative impact on mortgage rates.