Treasury Auctions

The Little-Known Reason Why Mortgage Rates Are Rising This Week (And Why They May Go Higher Still)

After starting the week with a run lower toward 5 percent, mortgage rates have reversed course. 

It started mid-day Tuesday and the culprit is Basic Economics.  Here’s why.

Mortgage rates are based on the price of mortgage-backed bonds and — like most things — mortgage-backed bonds prices are based in Supply and Demand. 

When bond supplies grow faster than the corresponding demand for them, bond prices tend to fall and when bond prices are down, bond yields are up.

Meanwhile, this week, the U.S. Treasury is making its largest weekly auction in history.  $115 billion in new debt, to be exact.  This means that before the week is through, $115 billion in new bond supply will have been introduced into the market and — so far — demand hasn’t kept pace with the new supply.

Prices are plunging.

For home buyers and rate shoppers, this is especially bad news because mortgage-backed debt is less desirable to investors than is treasury debt.  As a result, when treasury debt loses values, mortgage-backed debt tends to lose value, too.  Not always, but most of the time.

So, beginning with Tuesday afternoon’s auction, debt supplies have been growing faster than buyer demand. 

Bond markets are suffering from an abundance of debt supply and it’s been a big reason why mortgage rates are rising.  The week’s not over yet, either.  $28 billion is due for auction Thursday. 

If demand at the auction is similarly low, watch for mortgage rates to spike again.

Treasury Auctions

Weekly Economic Releases for Apr. 5th

This holiday-shortened week brings us the release of little relevant economic data for the markets to digest. We will, however, see the minutes from the last FOMC meeting and have a couple of Treasury auctions to watch. There is only one monthly economic report on tap this week and is one of the least important reports posted each month.

There is nothing of relevance scheduled for tomorrow. There is no relevant news scheduled until Wednesday afternoon when the FOMC minutes will be released. Market participants will be looking at these minutes closely. They give us insight to the Fed’s current thought process and individual Fed member opinions. Any surprises in the 2:00 PM ET release could cause afternoon volatility in the markets Wednesday and possible changes in mortgage pricing.

The two Treasury auctions are scheduled for Tuesday and Thursday. There is a 10-year Treasury Inflation Protected Security (TIPS) sale Tuesday and a regular 10-year Not e sale Thursday. We could see some weakness in bonds ahead of the sales as investing firms sell current holdings to prepare for them. This weakness is usually only temporary if the sales are met with a decent demand. The results of the auctions will be posted at 1:00 PM ET each day. If the demand from investors was strong, the bond market could rally during afternoon trading, leading to lower mortgage rates. If the sales were met with a poor demand, the afternoon weakness may cause upward revisions to mortgage pricing Tuesday and/or Thursday afternoon.

The only piece of monthly data is February’s Goods and Service Trade Balance report Thursday morning. This data gives us the size of the U.S. trade deficit, but unless it varies greatly from forecasts, it likely will not cause much movement in mortgage rates.

Overall, I am proceeding into this week very cautiously. There are several variables that could make this week very quiet or quite rocky for mortg age shoppers. Wednesday’s FOMC minutes could very well be a major market mover or a complete non-factor. The same goes for Thursday’s auction (Tuesday’s sale will probably have less influence on the markets than Thursday’s). In addition, the bond market will close early Thursday and remain closed until Monday in observance of the Good Friday holiday. This could lead to some additional volatility as traders look to protect themselves over the long weekend.

In other words, we may have a very calm week ahead of us, or we may see rates move noticeably several days. With no important economic data to drive trading and mortgage rates, bonds may move with stocks. This means large stock gains could lead to bond selling and higher mortgage rates. But stock weakness could lead to mortgage pricing improving for the week. Regardless, a lack of economic data is not reason to let our guard down if still floating an interest rate. Watch the market closely and proceed cautiously if not locked yet.

If I were considering financing/refinancing a home, I would…. Lock if my closing was taking place within 7 days… Lock if my closing was taking place between 8 and 20 days… Float if my closing was taking place between 21 and 60 days… Float if my closing was taking place over 60 days from now… This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.

Treasury Auctions

Weekly Economic Releases for Jan. 4th

This week bring us the release of only two monthly reports that are relevant to the bond market and mortgage rates. However, in addition to those two reports, we also will see the minutes from the last FOMC meeting and a couple of Treasury auctions that may influence bond trading and possibly mortgage rates.

The first of the two reports will be posted late Tuesday morning when the Commerce Department releases November’s Factory Orders data. This data gives us a fairly important measurement of manufacturing sector strength. It is similar to the Durable Goods Orders release that was posted late last month, except this report includes orders for both durable and non-durable goods. Durable goods are items that are expected to last three or more years such as electronics and autos. Examples of non-durable goods are food and clothing. Analysts are expecting to see a decline of 2.6% in new orders. This report generally does not have a huge impact on the bond market or mortgage rates, but it can influence bond trading enough to create a minor change in rates.

Also Tuesday will be the release of the minutes from the last FOMC meeting. This will give market participants insight to the Fed’s thinking and concerns regarding inflation and monetary policy. It may also help form opinions of the Fed’s future moves toward interest rates, even though the Fed appears to be running out of options. It is one of those pieces of information that may cause a great deal of volatility in the markets or be a non-factor, depending on what the minutes show. They will be released at 2:00 PM ET, so they shouldn’t affect the markets or mortgage rates until afternoon hours.

There are two Treasury auctions that are worth watching also. The 10-year TIPS Notes (inflation-indexed securities) will be auctioned Tuesday while the traditional 10-year Treasury Note will be sold Thursday. If investor demand for these sales is strong, we should see bonds strengthen during afternoon trading those days and possibly improve mortgage rates slightly. However, a lackluster interest in the sales could cause bond prices to fall and mortgage rates to move higher following the announcement of the sale results.

The final report of the week comes Friday morning when the Labor Department will post December’s employment figures. The Employment report is considered to be one of the most important monthly releases we see. It gives us the national unemployment rate, the number of jobs added or lost during the month and average hourly earnings, which is a key measure of wage inflation. Rising unemployment, a larger than expected drop in new payrolls and a small increase or even a decline in earnings would be good news for the bond market.

Current forecasts call for a 0.3% increase in the unemployment rate, pushing it to 7.0%. Analysts are expecting to see a drop in payrolls in the neighborhoo d of 475,000 with earnings rising 0.2%. If we see weaker than expected results, mortgage rates should improve Friday. However, stronger than expected readings will likely push mortgage rates higher.

Overall, the key data of the week will be Friday’s Employment report, but look for Tuesday to be important with the economic data, FOMC minutes and one of the two more important Treasury auctions. If they give us favorable results, mortgage rates will likely move lower for the week. But if not, we will probably see mortgage rates move higher again.

If I were considering financing/refinancing a home, I would…. Lock if my closing was taking place within 7 days… Lock if my closing was taking place between 8 and 20 days… Lock if my closing was taking place between 21 and 60 days… Lock if my closing was taking place over 60 days from now… This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guarante ed to be in the best interest of all/any other borrowers.