The first meaningful increase in mortgage rates since financial markets spasmed last March happened last week, lifting rates all the way back up to… November levels. The lift in rates was expected, given that there was a bit of a sell-off in bond markets after Democrats took control of both the administrative and legislative branches. Investors shifted positions in expectation that the change would mean a more significant bout of spending and fiscal stimulus, kicking growth and inflation higher sooner rather than later. Just the anticipation of a new spending spate seems to have been enough to push underlying Treasury yields to their highest levels in nine months or so.

Not quite on cue, President-elect Biden announced a new $1.9 trillion plan of stimulus spending, including new direct payments toward individuals, expanded and lengthened unemployment benefits, increased tax credits for child expenses, aid for states and funds to cover the costs of vaccinating hundreds of millions of Americans. These outlays would be covered by new Federal borrowing, of course, and that means a spate of new issuance of Treasury bonds, which would come on top of already record-high levels. There is also the potential for more considerable Federal debt issuance to come, too, as the new administration will no doubt have a range of spending priorities it will want to fund at a time when raising taxes to pay for them isn’t likely to happen until the economy is more fully on its feet again.

With debt supplies already high, there may be more supply than demand when any new debt comes to market, and the swell of new debt would of course have some effect on interest rates. However, for at least a time, the effect of excess supply on interest rates is greatly muted as there is a willing buyer in the market with unlimited resources to absorb it as needed: The Fed. Absent the Fed’s commitment to buy up $80 billion per month of Treasuries and another $40 billion of MBS, fixed-income markets might have already become clogged with supply, and interest rates would likely be higher than not. As more debt comes with new fiscal outlays, this tempering mechanism should help keep rates from rising more measurably. Presently, and with this in mind, Treasury yields have already settled back from last week’s peak by a bit, and mortgage rates should settle a bit, too.

Even though there are plenty of reasons that should keep rates from rising much in the near term, it’s also starting to feel as though they increasingly have fewer reasons to decline much, let alone routinely set new record lows as they did so many times in 2020. It’s early times, to be sure, but the holiday COVID-19 surge will likely start to diminish, greater levels of inoculation will begin to happen and (hopefully) expand as we go, and the warmer weather of spring (less being cooped up indoors with others) is within shouting distance for at least some of the U.S. All should permit somewhat greater levels of economic activity, and a fresh blast of cash into the economy from new stimulus would see growth accelerate to an even greater degree. All that argues for somewhat firmer than softer rates, but there is still a difficult patch to navigate, so rates aren’t going anywhere very fast at the moment.

Two expressions of the current (or at least near past) climate suggest that things remain a challenge. The Fed’s own survey of regional economic conditions (aka “Beige Book”) revealed a softer tenor of economic activity in the six weeks leading up to January 4. Of the 12 Federal Reserve districts, two reported essentially unchanged levels of activity and two reported declining levels. Seven reported only “modest” gains in their economies and just one said the improvement was “moderate”. The previous report was on balance rather stronger, so economic activity tailed as 2020 came to a close.

Although mortgage rates did kick a little higher last week, there’s no reason to expect any sustained increases, and the small bump should have no significant effects on either home buying or refinancing. Simply, the picture hasn’t changed much; rates are just less fantastic than they have been, and last week’s bump seems as though it’s already giving way to a fallback for this week. With that as a thought, we think that the average offered rate for a conforming 30-year FRM as reported by Freddie Mac will settle back by perhaps five basis points or so by the time next Thursday morning rolls around. No, we won’t be back at record lows, but not all that far from them.

Mortgage Market information provided by Jon Aucutt, Main Street Bank
31780 Telegraph Road, Suite 100
Bingham Farms, Michigan 48025
jaucutt@msbmi.com