Mortgage Rates In Best Territory Since February

This week's mortgage rates are hard to compare to last week's.  There are two simple reasons for this. 

The first is the recent removal of the adverse market fee that artificially increased rates for refinance transactions starting late last summer (discussed in greater detail last week). 

The second is the general strength in the bond market compared to last week.  Mortgage rates are, after all, based on trading levels in the bond market where higher prices coincide with lower yields/rates.  This is why mortgage rates and certain bond yields tend to correlate so well.

The 10yr Treasury yield is the perennial benchmark for mortgage rates.  Even though the correlation occasionally breaks down completely, it still does a great job of capturing momentum shifts for the overall bond market.

Recent momentum has been almost exclusively toward lower rates/yields.  In the short term, bonds benefited this week from their European counterparts as the European Central Bank maintained its rate-friendly stance.  Germany's 10yr yield is the closest thing we have to a hypothetical "EU 10yr yield."

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Based on the chart above, US rates weren't solely relying on European influence.  Volatility in the stock market helps explain the divergence as traders moved away from risk early this week and back in the other direction as the week progressed.

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Much of the risk aversion is predicated on fear and uncertainty surrounding rising covid case counts, especially as they concern the delta variant of the virus.  Investors conclude that, as long as that uncertainty persists, the Fed won't be in a position to start winding down its rate-friendly bond buying program, nor will the economy be firing on as many cylinders as it otherwise might.

These are the core reasons that noticeable shifts in case counts have produced a reliable reaction in rates/yields.  In the simplest terms: more covid = lower rates and less covid = higher rates, all other things being equal.

20210723 nl3.png

How have mortgage rates fared relative to Treasury yields?  Fairly well!  In fact, mortgages are much closer to all-time lows than Treasury yields.  Either way, you'd have to go back to February to see anything lower.

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If the bond market paid attention to the European Central Bank this week, then next week is at least as important with the Federal Reserve releasing its latest policy statement on Wednesday afternoon. 

The Fed is not yet in a position to make any substantive changes to current policy.  Nonetheless, investors will be paying careful attention to the verbiage of the announcement (as well as the press conference with Fed Chair Powell) for clues as to how and when policies may change in the future.

Recently Released Economic Data

Time Event Actual Forecast Prior
Monday, Jul 19
10:00 Jul NAHB housing market indx 80 82 81
Tuesday, Jul 20
8:30 Jun Build permits: change mm (%) -5.1 -2.9
8:30 Jun Housing starts number mm (ml) 1.643 1.590 1.572
8:30 Jun Building permits: number (ml) 1.598 1.700 1.683
8:30 Jun House starts mm: change (%) 6.3 2.1
Wednesday, Jul 21
7:00 w/e MBA Purchase Index 255.8 273.3
7:00 w/e MBA Refi Index 3267.6 3361.5
13:00 20yr Treasury Auction
Thursday, Jul 22
8:30 w/e Jobless Claims (k) 419 375 368
10:00 Jun Existing home sales (ml) 5.86 5.90 5.78
10:00 Jun Exist. home sales % chg (%) +1.4 -1.2
10:00 Jun Leading index chg mm (%) +0.7 0.9 1.2
Friday, Jul 23
9:45 Jul Markit Composite PMI 59.7 63.7
9:45 Jul Markit Services PMI 59.8 64.8 64.6
9:45 Jul Markit Manuf. PMI 63.1 62.0 62.1
Monday, Jul 26
10:00 Jun New Home Sales (ml) 0.676 0.800 0.724
10:00 Jun New Home Sales (%) (%) -6.6 3.0 -5.9
13:00 2-Yr Note Auction (bl) 60
Tuesday, Jul 27
8:30 Jun Durable goods (%) 0.8 2.1 3.2
9:00 May Monthly Home Price yy (%) 18.0 15.7
9:00 May Monthly Home Price mm (%) 1.7 1.8
9:00 May CaseShiller 20 yy (% ) 17.0 16.4 14.9
10:00 Jul Consumer confidence 129.1 123.9 127.3
13:00 5-Yr Note Auction (bl) 61
Wednesday, Jul 28
7:00 w/e MBA Purchase Index 251.7 255.8
7:00 w/e MBA Refi Index 3570.4 3267.6
14:00 N/A FOMC rate decision (%) 0.000 - 0.250 0.125 0.125
Thursday, Jul 29
8:30 Q2 GDP Advance (%) 6.5 8.5 6.4
10:00 Jun Pending Sales Index 112.8 114.7
10:00 Jun Pending Home Sales (%) -1.9 0.3 8.0
13:00 7-Yr Note Auction (bl) 62
Friday, Jul 30
8:30 Jun Core PCE Inflation (y/y) (%) 3.5 3.7 3.4
9:45 Jul Chicago PMI 73.4 64.6 66.1
10:00 Jul Consumer Sentiment (ip) 81.2 80.8 80.8

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