For those of you on Rate Watch: (And that’s almost everyone, interestingly)
In late April I wrote that interest rates appeared to be poised to take another small turn down. The next week I pointed out that they had done the opposite. It turns out that in May we saw a steady, small climb upward in interest rates, which have remained stubbornly high.
Before we jump into that, let’s remind ourselves that mortgage interest rates aren’t “set” by anyone – in particular, the Federal Reserve (Feds) do not set interest rates. You are no doubt hearing and seeing commercials that are telling you that you’d better get your refinance going now, because the Feds are about to raise rates. Always remember that these commercials are not meant to inform you; rather, they are meant to make you pick up the phone and call.
What may be more surprising is that neither banks, nor mortgage companies really “set” rates either. For sure they get to choose what interest rates they offer you each day, but they are responding to what the market is willing to pay your mortgage.
The “market” is comprised of large institutional investors (insurance companies, public and private pension funds, mutual funds, etc.). These investors calculate what they need to earn on a long-term investment (the average 30 year mortgage is held about 11 years nowadays) in order to compensate for inflation and the risk of not being paid back.
If the rate they can earn on investing in your mortgage is too low, they will simply back out of the market until either 1) the yield (your interest rate) is more attractive to them or 2) the expectation of inflation or risk calms down a little, and the interest rate you want to pay appears attractive again. In the meantime, they can invest in other investments, such as stocks, for instance.
This month the investors decided to reduce their purchases in the bonds that represent your mortgage. This means that the market (interest) rate for mortgages increased a bit. After a small rise, the rates stabilized at a slightly higher rate.
I’ve written this many times before: investors hate uncertainty. (And there is always uncertainty in volatile markets.) Economic reports almost always send mixed signals, unless the economy is very strong or very weak. Today it is neither, and interest rates are reflecting that uncertainty.
So where to now?
Looking at the chart above it appears the 10-year bond – whose yield currently sits close to the top of its established range this year – wants to come back down. While the 10-year bond doesn’t drive mortgage rates it tends to be a good proxy for them because the investment quality of them is similar to mortgage-backed securities, and they are purchased by the same investors.
Interest rates tend to jump up and “settle” down. You can see the upward-sloping curves are always steeper than the down-sloping ones. If the ten-year bond settles down – and there is reason to believe it will in the next few weeks – mortgage rates should follow, lagging right behind.
Next week – why interest rates are bound to rise fairly soon. (Hint: it’s the Feds, but not for the reasons you think.)