Mortgage rates have moved higher since the fiscal cliff deal was passed, although this has more to do with the Federal Reserve minutes that were released last week. The minutes revealed dissension among the 12 voting members about when to terminate the bond purchase program.
Here is what happened.
According to popular mortgage news blogger Rob Chrisman, “Federal Reserve policy makers said they would probably end their $85 billion monthly bond purchases sometime in 2013, with members decided between a mid- or end-of-year finish.”
By guaranteeing its purchase of U.S. Treasuries each month, the Federal Reserve has kept demand for bonds high, thus keeping bond prices high and bond yields low. Lower bond yields (and high prices) correspond to downward pressure on mortgage rates (through the 10-year Treasury). In this way, the Fed has helped to keep interest rates low.
This conversation spooked the markets last week as it greatly deviated from the previous messages from the Fed that they were committed to low interest rates through 2015, QE would be in place indefinitely (aka QE Infinity), and they would hold this course until the federal unemployment rate dropped below 6.5% (not believed to be this year).
Should the Fed leave the market, lower demand will result in lower bond prices and higher bond yields. The possibility of this loss caused investors to leave the bond market and sell while prices are high and yields are low. Investors do not want to be caught holding low-yield bonds when higher-yield cheaper possibilities are on the horizon.
Mortgage rates responded by jumping almost across the board as the 10-year Treasury yield moved from the mid-1.70s up to 1.93 percent.
[Related: January 7, 2013 CCL Mortgage Rates]
We don’t expect this jump in rates rates to last. We expect rates to slowly ease their way back down as the markets digest this information, and remember that this economic recovery is still very fragile. Also, many of the major fiscal cliff issues were “kicked down the road” and still need to be dealt. As future deadlines get closer, look for uncertainty to drive money into Treasuries and push interest rates lower.