Impact of Market Sentiment on Mortgage Rates

The volatility in market sentiment on Friday highlights the potential for economic data to quickly influence mortgage rates.

An upcoming inflation report holds the key to the next significant movement in a closely-monitored mortgage rate benchmark. It is crucial for both home buyers and investors to pay attention to this report.

The 10-year Treasury yield, which often affects mortgage rates, experienced a drop on Friday after previously reaching as high as 4.101%, as reported by TradeWeb. The spike in yield occurred due to the initial reading of the government jobs data for December. However, investors later reassessed this initial reading and took into account the lower-than-expected job growth in the services industry, leading to a pullback in the yield.

As the 10-year yield decreased, shares of home builders, a sector sensitive to factors influencing mortgage rates, saw an increase. The iShares U.S. Home Construction exchange-traded fund, which tracks home builders and related stocks, recorded a 1.2% gain in morning trading after a slight decline earlier.

In recent weeks, home buyers have experienced some relief as the 10-year yield has continued to decline. According to Freddie Mac’s weekly survey, the average 30-year fixed mortgage rate has dropped by more than one percentage point from its peak of around 7.8% in October to a recent rate of 6.6%.

There is a general expectation that mortgage rates will continue to decrease this year as inflation eases and the Federal Reserve lowers its target rates. However, if economic data indicates stronger-than-expected growth, it could exert upward pressure on mortgage rates in the short term.

Freddie Mac Survey Shows Small Increase in Interest Rates

Freddie Mac’s most recent survey, published on Thursday, revealed a slight increase of 0.01 percentage point in interest rates. This marks the end of nine consecutive weeks of rate drops. Rocket Mortgage, a prominent mortgage originator, is now quoting 30-year fixed purchase loans at approximately 7.13%, up from the previous rate of 6.99%.

While this increase may be a relief for the market, there are still potential risks to consider in the upcoming economic data. Futures traders’ expectations of a rate cut in March have risen slightly, with the CME FedWatch tool indicating a probability of six 0.25 percentage point rate cuts in 2024.

It is important to note that better-than-expected economic data could lead to a change in investors’ expectations for future rate cuts. This, in turn, could result in higher yields for the 10-year Treasury and subsequently higher mortgage rates. As a result, builder stocks may experience a dip in the near-term. It is recommended that traders closely monitor inflation data, with the consumer price index reading scheduled for release on Thursday.