Rates

As of Monday morning, rates are up a tick from Friday’s closing:

Important notes for understanding and using this information:

• Any site/chart that advertises rates (like the above) is showing a national average for one very specific loan scenario, as reported by survey respondents. These aren’t the rates that borrowers are locking in. Use this only as a tool to get a gauge of what ballpark to expect
• 30 Yr Fixed Conventional: a “top tier” scenario is used as a baseline (owner occupied, single family, 25% down, 780+ credit)
• Most important point: the best use of this index is to track the CHANGE from week to week. There are so many things that can cause discrepancies between borrowers, lenders, and quotes.

Commentary

Up until last Friday, 10yr yields closed at 4.17% for 5 days in a row. Last Friday threw a bit of a curveball with a small but noticeable break to even lower yields. At the start of the new week, bonds have moved quickly back to the familiar consolidation range marked by a floor of 4.17. Meaningful improvement from here will require concrete motivation from this week’s CPI/PPI.

Lock/Float Considerations

Rates are at the lowest levels in a month and a half after a friendly jobs report. That’s a compelling lock opportunity for the risk averse crowd. While there’s no guarantee that recently friendly momentum will continue, the risk-tolerant crowd tends to wait and see if the market starts trending upward before acting.

Econ Calendar – Potential Market Movers

• Wed., 12/11 – Core CPI – Consumer Price Index
• Thurs., 12/12 – Core PPI – Producer Price Index
• Thurs., 12/12 – Jobless Claims

Loan Program Updates

• 2025 Loan Limits are live:
  • Conventional 1 unit: $806,500
  • Conventional 2 units: $1,032,650
  • FHA 1 unit: $524,225
  • FHA 2 units: $671,200

Mortgage rates bounced hard off the long term lows back in September and had jumped almost a full percent by last week. In addition to the elevated levels, there’s been plenty of volatility. Nonetheless, rates managed to avoid breaking last week’s ceiling–even if only just. Does that mean it’s time for hope?

Hope is always a fine thing to have, but it’s not a strategy when it comes to mortgage rates.  Even if we consider that rates are based on financial markets, caution still makes sense.  Some market analysis might suggest this week’s ground-holding in rates is indeed a sign of a potential longer-term ceiling, but other analysis suggests an ongoing uptrend.  Neither is right or wrong considering the future can never be accurately predicted when it comes to rates.

The mortgage rate chart shows the “lower high” in terms of daily rates.

Because mortgage rates don’t change more than a few times a day, we have to look at bonds to track intraday changes.  Using the 10yr Treasury yield as a benchmark, we can see the persistent uptrend in yields.  Treasury yields tend to move in the same direction as mortgage rates with almost perfect correlation.

If we want to hold out hope for rates to move lower, it would help to be able to pin those hopes to objective developments.  On that note, all we have are economic reports and inflation.  Simply put, inflation would need to move lower and the economy would need to weaken in order to make a case for meaningfully lower rates.  None of this week’s data supports that case.

That said, this week’s data wasn’t overly troubling either.  The Consumer Price Index (CPI) came in right in line with forecasts earlier this week.  Unfortunately, those forecasts weren’t low enough for annual inflation to hit its target.  We wouldn’t have expected an annual target to be hit any time soon, but the fact is that monthly inflation needs to average 0.17-ish in order to hit a 2.0% target, and monthly inflation came in at 0.3% at the core level for the third month in a row. 

The annual chart of inflation makes it seem like progress is stalling, whereas it might be easier to imagine the continuation of a trend toward target levels in the monthly chart.  In fact, neither assessment is right or wrong and we’re increasingly see the Federal Reserve acknowledge that.

Multiple Fed officials gave speeches and/or participated in Q&A events this week and the tone was markedly different than it was the last time they were out in force.  Here are a few highlights, paraphrased:

Fed’s Kashkari

• Confident in path of inflation but don’t want to declare victory
• May take a year or two to achieve 2% goal
• If inflation surprises to the upside, that could affect rate cut plans

Fed’s Schmid

• Remains to be seen how much more the Fed will cut and where rates may settle

Fed’s Logan

• Seeing signs that the Fed may not need to cut rates as low as previously thought in order for inflation and job growth to be in balance.

Fed’s Musalem

• There’s some sense of higher inflation risk and some sense the Fed may not cut rates as much
• Data since the last meeting suggests economy may be stronger than expected

Fed’s Powell

• Economy sending signals that we don’t need to be in a hurry to cut rates
• Expects inflation to continue toward 2%, but it’s a bumpy path

This isn’t necessarily surprising from the Fed, but it’s definitely a change from where their collective heads were at in September.  At that time, we’d just seen a few significantly weaker employment reports and inflation data that was more indicative of gradual improvement.  Since then, those weak employment numbers have been revised higher and inflation has ticked up. 

The Fed along with the rest of the financial market is waiting to see if the data will show a big of a resurgence of growth and inflation.  If that happens, rates could easily continue to move higher.  If data softens again, rates have room to recover to lower levels.  Either way, the data will be the determining factor–especially the jobs report in early December. 

Mortgage rates spent the entire month of October moving higher at a fairly quick pace. Some of that had to do with stronger economic data, but at least as much had to do with the bond market (bonds dictate rates) adjusting to election probabilities. As we’ve been advising in recent weeks, the consensus was that a Trump victory (or improved odds thereof) was associated with upward pressure on rates.

The bond market left no doubts on election night as Treasury yields spiked well before any news team was anywhere close to confirming a winner. Notably, various betting sites underwent similar shifts simultaneously. The following chart shows overnight movement in 10yr Treasury yields, which tend to move like mortgage rates over time.

It’s impressive and telling that yields hit levels by 10:40pm ET that were right in line with where they would go on to end the following trading day. This was not a matter of financial markets guessing or speculating. It was a reflection of their efficiency and their constant quest to operate on the fastest possible timeline with the greatest possible precision. 

Note: this doesn’t mean we should always count on markets to predict the future. There are plenty of examples of similar scenarios where the market encounters a surprise and is forced to make a rapid correction.  This time around, things just happened to unfold largely in line with expectations.

What about the “red sweep?” 

One of the more dire expectations as far as interest rates are concerned was that both chambers of congress would end up with GOP majorities.  Full control by either political party coincides with higher rates, all other things being equal. As of Friday evening, control of the House remains undetermined–a fact that has played a role in helping rates recover a bit after the election night spike.  

The following chart shows a longer term view of Treasury yields with the early October jobs report reaction for context.  Note the relatively linear move higher in rate throughout the month, culminating in the final surge on election night and a return to 4.30% afterward.

Even if the GOP wins full control, it would be by a narrow enough margin to create uncertainty about some of the policy-related headwinds that interest rates might contend with in the coming year. 

What’s next for rates then?

Policy aside, rates will continue paying attention to economic data and inflation–a fact that was reinforced in Thursday’s Fed announcement. As expected, the Fed cut its policy rate by 0.25%. There was essentially no reaction in longer term rates–at least not due to the Fed itself. 

Longer term rates were already in the process of moving lower after the big surge on election night. In other words, it wasn’t the Fed!

What about mortgage rates specifically?

Mortgage rates may have moved lower on Fed day, but it had nothing to do with the Fed (see the chart above to understand how entrenched the bond market correction was by the time the Fed announcement came out).

Mortgage rates actually bounced back more than Treasuries.  The simplest reason has to do with expectations of increased Treasury issuance in the future. Treasuries are used to fund government spending.  More issuance means higher rates, all other things being equal.  Specifically, if tax policy creates a revenue shortfall, the US government pays for it with Treasuries.  While Treasuries are similar in movement to mortgage rates, the latter are based on mortgage backed securities (not something the government can issue to fund operations).  

As has been and continues to be the case, it is good to remember that market response to the election can be different from the market movement that occurs during the ensuing administration for a variety of reasons.  The 2016 election was the best recent example.  Rates spiked in 2017 and 2018 only to fall back to pre-election levels by the end of 2019.  Long story short, rates will be determined by the economy and actual changes in Treasury issuance.  Fiscal policy will have a bearing–possibly a big one–but not the final say.

Coming up next week…

The upcoming week brings several important economic reports with the two headliners being the Consumer Price Index (CPI) and the Retail Sales report.  CPI is a key inflation metric and there’s been some recent concern that inflation isn’t going as quietly into the good night as some may have hoped.  If this report shows monthly inflation metrics falling back in line with the friendlier numbers seen in the summer months, it could help rates continue to establish a ceiling after the recent surge.  

Financial markets will be closed on Monday for the Veterans Day holiday.

Last week’s newsletter warned that it was time to start thinking about incredibly high volatility potential due to events in the first few days of November. But as far as interest rates are concerned, the volatility is already here.

Rates jumped sharply higher to start the new week in a move that still has market watchers scratching their heads.  Some analysts pointed to election odds as a catalyst while others thought it had to do with trader positioning in advance of the big ticket events in the coming weeks.  Either way, Monday saw mortgage rates jump more than an eighth of a percent–something they almost never do without clearly defined provocation.

After hitting the highest levels in months on Wednesday, there’s been a microscopic recovery in the 2nd half of the week.  Hopefully, this means rates are content to wait here for the next major source of inspiration.  

Why “hopefully?” Because there’s never any way to ensure the future will behave as the present suggests when it comes to financial markets. So what can we know? There are a few things.

We know that rates moved a lot higher over the past 4 weeks than the average media coverage suggests. Mainstream weekly surveys only show a spike of about 0.40%. The actual spike in daily average rates was over 0.70%.

We also know that next week’s jobs report (on Friday) is a huge source of potential volatility, for better or worse. Then, in the following week, the election could have an even bigger impact.  Top it all off with the Fed’s next rate announcement a few days later and the recipe for volatility is clear.  As always, remember that volatility goes both ways depending on the outcome of these big ticket events.

Highlights from this week’s economic and housing data:

This week’s most noticeable bond market reaction came in response the weekly jobless claims data.  Initially, it caused yields to rise because claims were lower than expected.  But traders also considered that “continuing claims” (those who continued to file for U/E beyond the initial week) rose to the highest level in years.

Existing Home Sales came in lower than expected and have generally been bouncing along the lowest levels since the Great Financial Crisis more than a decade ago.

Weekly mortgage application data has been in the news recently due to surge in September as rates dropped.  The refi index quickly shifted back toward those lower levels as rates have spiked in October.

As dramatic as the chart above may seem, everything is happening on a micro scale for refinance applications these days compared to the past refi waves.