What’s driving current mortgage rates?
Average mortgage rates moved up just a little yesterday, shadowing changes in bond markets later in the day. However, Mortgage News Daily points out there are wide variations between lenders’ rates, meaning yours may remain unchanged.
Markets this morning were moving less sharply than in recent days. Most domestic economic data were much as anticipated, though unit labor costs were weaker. And the European Central Bank (the eurozone area’s equivalent of our Fed) announced earlier it would leave interest rates unchanged. Even the President’s late-night tweet yesterday about the Mexico immigration/trade talks left investors largely unmoved.
The data below the rate table are indicative of mortgage rates falling moderately today or perhaps holding steady. However, as we saw yesterday, events could easily overtake that prediction.
|Conventional 30 yr Fixed||3.938||3.938||Unchanged|
|Conventional 15 yr Fixed||3.438||3.438||-0.06%|
|Conventional 5 yr ARM||3.813||4.485||Unchanged|
|30 year fixed FHA||3.438||4.423||+0.06%|
|15 year fixed FHA||3.438||4.386||Unchanged|
|5 year ARM FHA||3.375||4.942||+0.02%|
|30 year fixed VA||3.563||3.735||+0.06%|
|15 year fixed VA||3.563||3.874||Unchanged|
|5 year ARM VA||3.438||4.184||+0.02%|
|Your rate might be different. Click here for a personalized rate quote. See our rate assumptions here.|
Financial data affecting today’s mortgage rates
First thing this morning, markets looked set to deliver mortgage rates that are moderately lower or unchanged today. By approaching 10:00 a.m. (ET), the data, compared with this time yesterday, were:
- Major stock indexes were mostly very slightly higher soon after opening (neutral for mortgage rates). When investors are buying shares they’re often selling bonds, which pushes prices of Treasuries down and increases yields and mortgage rates. The opposite happens on days when indexes fall. See below for a detailed explanation
- Gold prices were slightly down at $1,339 from $1,342 an ounce. (Not good for mortgage rates) In general, it’s better for rates when gold rises, and worse when gold falls. Gold tends to rise when investors worry about the economy. And worried investors tend to push rates lower)
- Oil prices inched down to $52 from $53 a barrel (neutral for mortgage rates, because energy prices play a large role in creating inflation)
- The yield on 10-year Treasuries held steady at 2.09 percent. (Good for borrowers because the rate’s falling this morning after a small rise yesterday). More than any other market, mortgage rates tend to follow these particular Treasury yields
- CNNMoney’s Fear & Greed Index edged back down to 31 from 34 out of a possible 100. It was up at 40 this time last month. (Good for borrowers. “Greedy” investors push bond prices down (and interest rates up) as they leave the bond market and move into stocks, while “fearful” investors do the opposite. So lower readings are better than higher ones
If nothing changes in coming hours, today might be a slightly better day for mortgage rates.
Today’s drivers of change
Trade disputes and interest rates
On Tuesday, Federal Reserve Chair Jerome H. Powell made a statement at a two-day Fed conference in Chicago. He referred to America’s trade disputes with China, Mexico and others and promised:
We do not know how or when these issues will be resolved. We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.
Investors took that as a sign that the Fed would cut rates later this year if the President’s policies prove troublesome for the economy. Some are already predicting the first such cut in July and a second later in the year.
Late last night, President Trump tweeted that, “Immigration discussions at the White House with representatives of Mexico have ended for the day. Progress is being made, but not nearly enough!” If more progress isn’t made by Monday, tariffs of 5 percent are due to begin that day on all goods imported from Mexico. Those will, it’s threatened, then “gradually increase,” ratcheting up to 25 percent by October.
Meanwhile, the US-China trade dispute is very much alive. On Tuesday, the Chinese government’s commerce department issued a statement. Markets immediately seized on the conciliatory tone in the opening paragraph and changed direction. But it’s still unclear whether they’ve digested the significance of succeeding paragraphs, which read:
However, consultations are principled and need to be based on mutual respect, equality and mutual benefit… It is hoped that the US will abandon its wrong practices and work in tandem with the Chinese side. In the spirit of mutual respect, equality and mutual benefit, we will control differences and strengthen cooperation to jointly safeguard the healthy and stable development of China-US economic and trade relations.
Costs of trade wars
On Monday, we reported Investopedia’s calculation that global investors had lost $4 trillion in stock markets during May. It suggested that was “amid intensifying global trade tensions.” We missed Bloomberg’s article that day that suggested those losses may be closer to $7 trillion. It went on to report, “This May was the second worst [for markets] since 1962.”
Markets hate trade disputes because they introduce uncertainty, dampen trade and are disruptive to established supply chains. Some fear a trade war on three fronts (one with the EU is a possibility) might be a drag on the global economy that hits America especially hard. And that fear, in turn, is likely to exert downward pressure on mortgage rates. That’s not to say they won’t sometimes move up in response to other factors. They did so on Tuesday. But, absent a resolution, such trade wars may well set a new direction that eventually emerges as a downward trend. However, any reduction in China’s buying of American government debt would likely have the opposite effect.
Inverted yield curve
You may have read about the inversion of the bond yield curve in April. And you may understandably have chosen to skip over that bit. But it’s back. And it might be important.
The jargon hides a simple phenomenon: Yields on short-term U.S. Treasury bonds are currently higher than those for long-term ones. So at one point last week, you could get a yield of 2.35 percent on a 30-day Treasury bill but 2.22 percent on a 10-year one. And that’s highly unusual. Normally, you get a higher return the longer you’re locked into an investment.
The problem is, inverted bond yields have come to be seen as harbingers of economic gloom. When we last reported on this in April, we quoted CNBC:
The U.S. Treasury yield curve has inverted before each recession in the past 50 years and has only offered a false signal just once [in 1998] in that time, according to data from Reuters.
However, last Thursday, Wells Fargo Securities’ Michael Schumacher told CNBC, “… we think it’s not really a recession predictor at this point.” And a day earlier, still concerning the inverted bond yield curve, The New York Times suggested, “At a minimum, it indicates that bond investors believe the Federal Reserve will soon need to cut interest rates — in effect, that it overshot with those four rate increases last year.”
So it’s too soon to panic. But some are getting the jitters.
Treasuries and mortgage rates
You may remember that we recently stole a simile from Mortgage News Daily. Mortgage rates are like dogs while yields on 10-year Treasury bonds are like their owners. Mostly, mortgage rates trot happily along on their leashes at their human’s heels. But occasionally they run ahead, dragging the owner along. And at other times they sit stubbornly and have to be dragged along.
Recently, they’ve been sitting a lot. If they’d been keeping up with those Treasury yields, rates would be even lower than they currently are. Why? Apparently, investors are concerned they’re not being rewarded sufficiently for the extra risk they shoulder when they buy mortgage-backed securities rather than Treasury bonds. And some are worried about the possibility of the government reforming Fannie Mae and Freddie Mac.
Those Treasury yields are one of the main indicators we use to make predictions about where rates will head. And, with that tool less reliable than usual, we sometimes struggle to get those predictions right. Until the relationship between rates and yields gets back in synch, you should bear that in mind.
Rate lock recommendation
Trends are impossible to discern from just a few days’ changes. So don’t read too much into recent fluctuations. Frustrating though it is, there really is no way of knowing immediately what movements over a brief period mean in their wider context.
Even when one’s discernable, trends in markets never last forever. And, even within a long-term one, there will be ups and downs. Eventually, at some point, enough investors decide to cut losses or take profits to form a critical mass. And then they’ll buy or sell in ways that end that trend. That’s going to happen with mortgage rates. Nobody knows when or how sharply a trend will reverse. But it will. That might not be wildly helpful but you need to bear it in mind. Floating always comes with some risk.
Short- and long-term differences
Of course, it’s possible the Federal Reserve’s March statement on rates has established a long-term downward trend. But you can still expect to see rises and falls (such as those over the last several weeks) within it as other risk factors emerge and recede. And, depending on how near you are to your closing date, you may not have time to ride out any increases.
Chad Morganlander, portfolio manager at Washington Crossing Advisors, on Tuesday provided CNBC’s Trading Nation with one possible scenario. Remember, mortgage rates often shadow yields on 10-year Treasuries:
In the short range, you could see a 10 to 15 basis point gap higher, but … inflation expectations we believe will be marked down and also global growth or aggregate demand we think will soften over the course of 2019 into 2020 … The yield on the 10-year could move up to 2.25% to 2.3% in the near term. Beyond that, it could fall back down to 2% and even to 1.75% in the next six to nine months …
In other words, we may see mortgage rates traveling higher in the short term before heading back down later in the year. But remember, that’s just one person’s (highly informed) opinion.
We suggest that you lock if you’re less than 30 days from closing. Of course, financially conservative borrowers might want to lock immediately, almost regardless of when they’re due to close. After all, current mortgage rates are among the lowest ever. On the other hand, risk takers might prefer to bide their time. Only you can decide on the level of risk with which you’re personally comfortable.
If you are still floating, do remain vigilant right up until you lock. Continue to watch key markets and news cycles closely. In particular, look out for stories that might affect the performance of the American economy. As a very general rule, good news tends to push mortgage rates up, while bad drags them down.
When to lock anyway
You may wish to lock your loan anyway if you are buying a home and have a higher debt-to-income ratio than most. Indeed, you should be more inclined to lock because any rises in rates could kill your mortgage approval. If you’re refinancing, that’s less critical and you may be able to gamble and float.
If your closing is weeks or months away, the decision to lock or float becomes complicated. Obviously, if you know rates are rising, you want to lock in as soon as possible. However, the longer your lock, the higher your upfront costs. On the flip side, if a higher rate would wipe out your mortgage approval, you’ll probably want to lock in even if it costs more.
If you’re still floating, stay in close contact with your lender, and keep an eye on markets. I recommend:
- LOCK if closing in 7 days
- LOCK if closing in 15 days
- LOCK if closing in 30 days
- FLOAT if closing in 45 days
- FLOAT if closing in 60 days
At last, we have a meaty week for economic reports. Tomorrow is the most important day. Because that’s when the official employment situation report is published. Today’s reports generally move markets only if they’re seriously better or worse than expected.
Markets tend to price in analysts’ consensus forecasts (below, we mostly use those reported by MarketWatch) in advance of the publication of reports. So it’s usually the difference between the actual reported numbers and the forecast that has the greatest effect. That means even an extreme difference between actuals for the previous reporting period and this one can have little immediate impact, providing that difference is expected and has been factored in ahead. Although there are exceptions, you can usually expect downward pressure on mortgage rates from worse-than-expected figures and upward on better ones. However, for most reports, much of the time, that pressure may be imperceptible or barely perceptible.
- Monday: May purchasing managers’ index (PMI) for manufacturing from Markit (actual 50.5 points — its lowest since Aug. 2009); Institute of Supply Management (ISM) manufacturing index for May (actual 52.1 percent; forecast 53.3 percent). Also, April construction spending (actual unchanged; forecast +0.5 percent)
- Tuesday: April factory orders (actual -0.8 percent; forecast -0.9 percent). Also, Fed conference starts
- Wednesday: All for May: employment numbers from ADP (actual +27,000 jobs, down from April’s 271,000); services PMI from Markit (actual 50.9 points) ; ISM nonmanufacturing index (actual 56.9 percent; forecast 56.0 percent). Also, Fed conference ends
- Thursday: Q1 April trade deficit (actual $50.8 billion; forecast $50.4 billion). Also revised estimates for the first quarter for productivity (actual +3.4 percent; forecast +3.5 percent) and unit labor costs (actual -1.6 percent annualized; forecast -1.1 percent)
- Friday: May employment situation report, including nonfarm payrolls (forecast +174,000 new jobs); unemployment rate (forecast 3.6 percent); and average hourly earnings (forecast +0.3 percent)
Tomorrow’s the key day.
What causes rates to rise and fall?
Mortgage interest rates depend a great deal on the expectations of investors. Good economic news tends to be bad for interest rates because an active economy raises concerns about inflation. Inflation causes fixed-income investments like bonds to lose value, and that causes their yields (another way of saying interest rates) to increase.
For example, suppose that two years ago, you bought a $1,000 bond paying 5 percent interest ($50) each year. (This is called its “coupon rate” or “par rate” because you paid $1,000 for a $1,000 bond, and because its interest rate equals the rate stated on the bond — in this case, 5 percent).
- Your interest rate: $50 annual interest / $1,000 = 5.0%
When rates fall
That’s a pretty good rate today, so lots of investors want to buy it from you. You can sell your $1,000 bond for $1,200. The buyer gets the same $50 a year in interest that you were getting. It’s still 5 percent of the $1,000 coupon. However, because he paid more for the bond, his return is lower.
- Your buyer’s interest rate: $50 annual interest / $1,200 = 4.2%
The buyer gets an interest rate, or yield, of only 4.2 percent. And that’s why, when demand for bonds increases and bond prices go up, interest rates go down.
When rates rise
However, when the economy heats up, the potential for inflation makes bonds less appealing. With fewer people wanting to buy bonds, their prices decrease, and then interest rates go up.
Imagine that you have your $1,000 bond, but you can’t sell it for $1,000 because unemployment has dropped and stock prices are soaring. You end up getting $700. The buyer gets the same $50 a year in interest, but the yield looks like this:
- $50 annual interest / $700 = 7.1%
The buyer’s interest rate is now slightly more than seven percent. Interest rates and yields are not mysterious. You calculate them with simple math.
Mortgage rate methodology
The Mortgage Reports receives rates based on selected criteria from multiple lending partners each day. We arrive at an average rate and APR for each loan type to display in our chart. Because we average an array of rates, it gives you a better idea of what you might find in the marketplace. Furthermore, we average rates for the same loan types. For example, FHA fixed with FHA fixed. The end result is a good snapshot of daily rates and how they change over time.