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As the Dust Settles: Mortgage Rates Ease Back After FOMC Spike

Last week, we explained why mortgage rates jumped after the Federal Open Market Committee (FOMC) meeting. As the dust settles, the scope of the rate hike gets a little more clear.

Freddie Mac compiles a weekly national average of the 30-year fixed mortgage rate. In the span of two months, that national average rose from 3.35% (May 2) to 4.46% (June 27). The elevation of mortgage rates had been happening for awhile, but the movement upon the conclusion of the FOMC meeting brought the national average from 3.93% to its current high.

Traders had already been leaving the bond market prior to the FOMC meeting, but the conclusion of the week’s events accelerated the trend. With speculation that the Fed could begin “tapering” its quantitative easing program by the end of 2013, the bottom fell out of the market.

$80 billion was pulled from funds during June – double the previous low from the height of the recession. During this time, the yield for the 10-year Treasury bond rose from 2.13% to 2.52%.

Investors are leaving the bond market ahead of the Fed. When the Fed scales back its $85 billion in purchases per month, the bond market will lose a large source of demand. Yields will rise and prices will fall. This means that current bond holders would be stuck with expensive, low-yielding bonds. Investors are leaving the market to cushion the fall.

Though higher yields are positive for investors, they hurt mortgage rates, and that is why we have seen the rise in mortgage pricing.

After the initial spike, mortgage rates have actually fallen back to earth. The 30-year fixed, for example, dropped from 4.375% (4.463% APR) on Monday, June 24 to 4.000% (4.087% APR) on July 1. For the complete update from Central Coast Lending, click HERE.

Written by Central Coast Lending - Go to Central Coast Lending's Website/Profile