Will Interest Rates Drop This Week?

Casey Fleming

Last week I wrote that this could be the week that interest rates begin to drop because rates are probably a little higher than where they should be and it is a very light week in terms of economic reports.  Political news, rather than economic news, seems to have driven investors away from bonds for a while, but eventually they will return.  This could be the week it finally happens.

As for economic reports this week, there are none due today (Monday.)  Tomorrow December job openings could be a market-mover, but it isn’t likely.  Wednesday there are again no economic reports due out.  Thursday’s weekly jobless claims could have an impact if they are way off expectations, but it is more likely they will improve the bond market than worsen it.  Finally, Friday the Consumer Sentiment Index is the big kahuna.

It’s a very light week for economic news.

With little news-driven impetus to drive markets, bond markets (which drive interest rates) are most likely to settle in to long-term trends, with the possibility of being driven by unexpectedly large movements in the stock market.  If bonds are oversold, as some think they are, then we should see a rally in bonds and improvement in interest rates, particularly mortgage rates.

Mortgage rates may follow Treasury yields down this week
Mortgage rates could drop this week

Looking at the trends over the last week, you can see that the 10-year Treasury bond (red line) fluttered about within a narrow range, as predicted.  Mortgage-backed securities, (blue line) on the other hand, rallied just a little last week – investors were cautiously poking their nose back into the MBS market.  Lenders, however were having none of it and despite having very low pipeline volume did not improve their rates at all.  (Freddie Mac Weekly Mortgage Market Survey, green line.)  That is likely to change this week.

Margins rose in January but are falling now
Lender’s margins are dropping, putting further pressure on mortgage rates

In this chart we track the margin that you pay over the wholesale cost of funds.  As lenders became overwhelmed with business last year they raised their margins to slow down the incoming volume.  In September when incoming volume began to slow down, margins began to drop and have been moving down slowly ever since.  Margins popped up around the holidays (many in the industry take the holidays off, so over-staffing wasn’t an issue) and they remained high leading up to the inauguration, but appear to be headed down again.  To what level only time will tell, but lenders are hungry for business right now – it very well may have further to fall.

All of this points to an improving market at the retail level – in other words, better mortgage rates.  Stay tuned, and let’s see where it goes!

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
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This article represents the opinion of Casey Fleming, and not necessarily that of C2 Financial Corp. This analysis was prepared with the best information available at the time it was written. Neither Casey Fleming, nor C2 Financial, have any magical insider information about bond markets, real estate markets or mortgage markets that would make economic projections any more reliable than any other source. No warranty is made that the outcome will reflect the projections in this article, and neither Casey Fleming nor C2 Financial Corp. are responsible for decisions that you make regarding your own choices about your real estate or mortgage or those of your clients.

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