Mortgage rates are chasing Treasury yields lower — for now


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After surging in the days leading up to last week’s Federal Reserve meeting on a series of worrisome inflation reports, mortgage rates and long-term Treasury yields have retreated to levels not seen in two weeks.

Loan lock data tracked by Optimal Blue showed borrowers were locking in rates on 30-year fixed-rate mortgages Tuesday at an average rate of 6.76 percent, down 5 basis points from last week’s peak of 6.81 percent and a 17 basis-point drop from a 2023 high of 6.93 percent registered on Feb. 28.

Mortgage rates drop from Fed meeting levels


Similarly, 10-year Treasury yields, a barometer for mortgage rates, dipped below 4.20 percent Wednesday for the first time since March 14.

Homebuyer demand for purchase loans was essentially unchanged last week, with applications down 0.2 percent from the week before after adjusting for seasonal factors, the Mortgage Bankers Association (MBA) reported Wednesday. The MBA’s weekly lender survey showed demand for purchase loans was down 16 percent from a year ago.

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Joel Kan

“Mortgage application activity was muted last week despite slightly lower mortgage rates,” MBA Deputy Chief Economist Joel Kan said in a statement. “The 30-year fixed rate edged lower to 6.93 percent, but that was not enough to stimulate borrower demand. Purchase applications were essentially unchanged, as homebuyers continue to hold out for lower mortgage rates and for more listings to hit the market.”

With rates remaining elevated, Kan said few homeowners have an incentive to refinance to get a lower rate. Refi requests were down 2 percent last week compared to the week before, and 9 percent from a year ago.

While the Federal Reserve has direct control over short-term interest rates banks charge for overnight loans, rates on long-term government bonds and mortgage-backed securities (MBS) are determined by supply and investor demand. The Fed has been a player in the markets for both investments, buying trillions of Treasurys and MBS during the pandemic to keep borrowing costs low.

Fed unwinding its $7 trillion balance sheet

Source: Board of Governors of the Federal Reserve System, Federal Reserve Bank of St. Louis.

Policymakers at the central bank left short-term interest rates unchanged at last week’s meeting. But Fed Chair Jerome Powell said they’re also considering slowing the pace at which the Fed unwinds its $7 trillion balance sheet. Tapering the pace of “quantitative tightening” could give mortgage rates additional room to drop.

Forecasters see more room for rates to drop

FNMA MBA mortgage forecast March 2024

Source: March 2024 forecasts by economists at Fannie Mae and the Mortgage Bankers Association.

In a March 21 forecast, MBA economists predicted rates on 30-year fixed-rate mortgages will drop to 6.1 percent by the end of this year, and average 5.6 percent in Q4 2024.

“Lower rates should help to free up additional inventory as the lock-in effect is reduced, but we expect that will only take place gradually, as we forecast that rates will move toward 6-percent by the end of the year,” Kan said.

Economists at Fannie Mae have a more cautious outlook, predicting in a March 19 forecast that rates on 30-year fixed-rate loans won’t hit 6.0 percent until Q4 2025.

duncan

Doug Duncan

“Hotter-than-expected inflation data and strong payroll numbers are likely to apply more upward pressure to mortgage rates this year than we’d previously forecast, as markets continue to evolve their expectations of future monetary policy,” Fannie Mae Chief Economist Doug Duncan said of the forecast.

Fed policymakers signaled last week in their March 20 Summary of Economic Projections that they still expect to cut short-term interest rates three times this year, by three-quarters of a percentage point.

Futures markets tracked by the CME FedWatch Tool show investors don’t expect the Fed to cut rates until June. Futures markets on Wednesday were pricing in a 70.4 percent chance of one or more rate cuts by June 12, up from 57.8 percent on Feb. 27.

With Fed policymakers insisting any adjustments to rates will be data driven, Friday’s release of the central bank’s preferred gauge of inflation, the personal consumption expenditures (PCE) price index, will be closely watched.

PCE and Core PCE trending down


At 2.4 percent annual growth in January, headline PCE has been trending down toward the Fed’s 2 percent goal for 4 months in a row. Core PCE, which excludes the cost of food and energy, has been moving in the right direction for 8 months.

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