After bottoming to 2 month lows late last week Mortgage rates have gone higher. The move was relatively gradual at first, but the pace picked up today after a major inflation report came out much stronger than expected. Why do prices care? about inflation? Here is a short one Explainer for those who need it:
Mortgage rates are mainly determined by trading in the bond market. After all, bonds are essentially loans where the bond buyer is the lender / investor who provides a flat rate and earns interest over time. Because these investors get value based on payments over time, the investor / lender’s decision to buy this bond will be less profitable if inflation robs those future dollars of purchasing power. When investors have reason to believe that inflation is going to rise (or immediate signs that it is rising), they don’t want to pay as much for a given bond as they may have had a few days / hours / minutes ago.
Bottom line: Inflation is undermining the value of bonds and forcing investors to compensate for this with higher yields. That scenario played out immediately in the bond market today, and 10-year government bond yields rose sharply on the inflation report. Mortgage-backed securities were fueled in a similar manner. But the average mortgage lender didn’t raise rates quite as quickly as market action suggested. There are a few reasons for this, but timing is the biggest factor.
Yesterday’s mortgage rates were higher than Monday’s, and arguably they are didn’t have to be. At the end of the day, mortgage bonds were actually in a STRONGER form. The timing of the market move was such that lenders could better wait and see how the bond market opened this morning. When it made its way into a weaker area, lenders had less ground to cover as they were already taking a slightly more conservative stance than they were on Tuesday afternoon.
Whichever way you slice it, the average lender is light back to the low 3s now after flirting with “high 2” in some cases (compliant, conventional 30 years with a bug-free scenario fixed).