I track mortgage interest rates by tracking mortgage-backed securities (bonds) because the yield that investors want to earn by investing in mortgages ultimately ends up driving the interest rate you pay.
I like to track the U.S. 10-year treasury bond too because it is very easy to track in real time (even over the course of the day,) competes very directly with mortgage-backed securities and they tend to track together.
The chart below represents trend lines for the 10-year bond (red) mortgage-backed securities (blue) and interest rates locked at the retail level (green.) These trend lines help illustrate the momentum of the market, and to some degree help us estimate the (very near) future.
On February 11th you can see both the 10-year bond and mortgage-backed security yield bottomed out, and bounced up. It wasn’t a dramatic bounce, but it was a notable bounce nevertheless.
Toward the end of this last week we watched as the stock market continued to rebound from January lows, pulling investment cash out of bonds back into equities. From the perspective of the last 14 months interest rates today are still very good, and from an historical perspective they are unbelievably good.
The question is, “What does the short term hold?”
The next chart shows the yield spread between the cost of funds (mortgage-backed securities) and the retail interest rates. Think of this as the gross profit margin for the lenders. You’ll notice that since the beginning of the year the margin has been unusually high, at least by recent standards. Last weekend I wrote that either this is the new normal, or that competition would drive the margin down, either because underlying rates would go up or retail rates would go down.
The good news is that I was right – the margin had to “normalize.” Unfortunately, underlying rates have gone up, so retail interest rates actually took a small bump up this week.
What does this mean for next week?
I’ve said before that the interest rate market is a massive machine with a million moving parts, but there are some parts that matter more. One major part is what the Governors of the Federal Reserve are thinking. While the Federal Reserve does not set mortgage interest rates, their actions and announcements do tend to have a noticeable impact on how investors invest their money.
Well, the Feds meet every six weeks, and the next meeting is March 15-16 – ten days from now. Recent strength in the stock market and recent economic reports have been mixed, although slightly positive. While at this point few expect the Feds to increase short-term rates at the next meeting, investors pay very close attention to their comments after the meeting as an indication of future Fed actions.
Their comments when they last met in January indicated a bias toward stable short-term rates because of worries about the strength of the economy. But comments after the meeting that reflect a renewed optimism after the April 15-16 meeting could move investors to sell bonds, driving up rates.
As for setting mortgage rates, lenders will generally be a bit cautious in the week leading up to a Fed meeting, so a further narrowing of the yield spread seems unlikely. If that is the case, rates are far more likely to go up this coming week than down, although stability is certainly a possibility.
This coming week is a quiet one for economic reports, although you never know when some unexpected news might pop up and move the market. But if bond yields drop next week retail rates are unlikely to follow, so rates would stay about where they are. If they bond yields stabilize, the current margin is unlikely to compress, so rates stay about where they are. If bond yields rise rates are likely to jump in reaction.
If you are thinking of starting a refinance, get your loan started on Monday so you can be ready to lock. If you are a loan officer, either work with a bias to locking sooner rather than later, or at the very least have your finger on the lock button this week.
This article represents the opinion of Casey Fleming, and not necessarily that of C2 Financial. 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 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 are responsible for decisions that you make regarding your own choices about your mortgage or those of your clients.
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