Interest rates pretty much flatlined this week. As I wrote last week it was a busy week for economic reports, but they pretty much all came in very close to where the consensus of a survey of economists thought they would. Most showed a very slight surprise to the upside, which is not good for bonds because it implies the risk of inflation is greater than expected, but the differences were very small.
In the chart above you can see that the yield on 10-year Treasury Bonds (red line) moved up very slightly on Monday and ended the week at almost exactly where it ended last week. The Fannie Mae 60-day yield (the blue line and essentially the wholesale price of interest rates to mortgage lenders) followed along. The Freddie Mac Mortgage Market Survey (the green line, and a backward look at the interest rates borrowers locked loans at over the past week) moved down the tiniest bit. It’s a mid-week to mid-week look, so these locks included Thursday and Friday from the previous week, when we saw a very slight downtick in rates, just like this week.
In this chart we compare the wholesale cost of funds to the Freddie Mac survey to measure what kind of margin lenders are asking for – a good measure of the risk they see in locking loans that won’t close for a while. You can see by the blue line that the margin dropped a bit this week after rising the last two, driving interest rates down ever so slightly at the end of the week. The red line is a 30-day moving average to show long-term trends.
2015 was a slower year than 2016, so lenders worked with thinner margins in order to keep pipelines full. Because this year is starting out very slow for the industry and we expect it to stay that way, I would expect lender margins to compress some more before we get to summer. What can we expect for this coming week?
Economic Reports Week of February 20th
Monday is a holiday so no economic reports are due out, and the markets are closed.
Tuesday is very light on reports with little chance of market-moving economic data. Wednesday Existing Home Sales could be a market-mover if the report misses or exceeds its forecast by much. Last month there were 5.49 mm existing homes sales in the U.S.; this month economists forecast 5.55 mm. We’ll see. A number on the low side could be very good for bonds, and the weather on both coasts in January may very well have kept home buyers at home.
Thursday we have the Jobless Claims report which appears to be trending down, and the Chicago Fed index. Both could, but are not likely to be, market-movers.
On Friday New Home Sales are likely to be tame, but the Consumer Sentiment Index – which is expected to be falling – is the report this coming week with the most potential to influence the bond market.
Barring unexpected news interest rates should be about the same Tuesday as they were on Friday. Wednesday could see movement, but the direction will most likely depend on the existing home sales report. Keep your eye on that.
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 Corp., 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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