Mortgage rates dropped sharply lower today relative to the amount of movement in the underlying bond market with the average lender right in line with the lowest levels since late 2022. Because rates are directly tied to the prices of those bonds, the correlation tends to be almost perfect over time. [thirtyyearmortgagerates] But there are always scattered examples of one leap-frogging the other. These inconsistencies can arise for several reasons. In today’s case, it happened due to late-day strength in bonds yesterday afternoon coupled with the structure of the underlying mortgage bond market. An explanation of the latter would be woefully esoteric in the context of a daily mortgage rate update–even for industry professionals. In the simplest possible terms, it has to do with the range of interest rates allowed in each grouping of mortgage backed securities (MBS). As investor sentiment shifts in favor of the next lower grouping, it effectively greases the skids for rates to slide down into the range associated with that grouping. The overall set-up is reminiscent of September 2024 when rates were doing the same thing for the same reasons ahead of Fed meeting with a virtual 100% chance of a rate cut. Back then, mortgage rates moved paradoxically higher after the Fed rate cut.  The same thing could happen this time, but it’s by no means guaranteed. In fact, last year’s Fed rate cut wasn’t the catalyst for rising mortgage rates. Instead, it was an upbeat shift in economic data in early October. In other words, rates will take their next major cues from incoming economic data over the next few weeks. 

After last week’s CPI data was taken mostly in stride, the only other potential economic data hurdle was this morning’s Retail Sales report. Whereas CPI was merely on the hotter side of the consensus, Retail Sales came out unequivocally stronger, with the control group hitting the 6.0% mark in year-over-year terms.  Even after subtracting 3% annual inflation, this is a strong economic signal and it was no surprise to see bonds lose ground immediately following the release. It’s been more of a surprise to see a reversal of those losses and a return to modestly positive territory less than an hour after the data.  There’s actually no obvious reason for it without relying on conjecture.
What we  can see is that the Treasury recovery picked up steam at the 9:30am NYSE open as yields fell in concert with stock prices. Could be as simple as some profit taking and asset allocation trading.

Consumers are so concerned about rising costs that they often forego coverage altogether, according to two separate studies from Valuepenguin and Realtor.com.

While equity still sits near historic highs, price growth moderation led to shrinkage of the total amount available and a rise in underwater mortgages.

The dispute coincides with Trump’s effort to push out Fed Governor Lisa Cook for alleged mortgage fraud, which the president maintains creates sufficient cause.

Getting a dwindling number of mortgages distressed for over a year off the books could improve the enterprises’ financial position.

California-based Linkhome Holdings’ new platform allows buyers to use cryptocurrency for property purchases.

Uneventful Rally. Retail Sales on Deck

Bonds began the week on a stronger note, but not for any glaringly obvious reasons. The same was said about Friday’s weakness, so perhaps we’ll just call it a wash and assume that traders are getting into (or out of) position(s) ahead of this week’s Fed Day. Thus morning’s NY Fed Manufacturing data fit the rally narrative, but most of the gains were in place beforehand–not to mention the limited track record of impact from that report. Volumes were exceptionally light and volatility was exceptionally low after the initial gains in the AM. Tuesday’s Retail Sales data is more capable of moving the needle.

Econ Data / Events

NY Fed Manufacturing

-8.7 vs +5.0 f’cast, 11.9 prev

Market Movement Recap

10:50 AM Flat overnight with early, modest gains. MBS up 3 ticks (.09) and 10yr down 2.3bps at 4.043

02:29 PM Steady gains.  MBS up 6 ticks (.19) and 10yr down 3.4bps at 4.033

03:46 PM Boring and green.  MBS still up 6 ticks (.19) and 10yr down 2.6bps at 4.04

Mortgage rates have done almost nothing but move lower over the past 4 months. The first Fridays in August and September account for about half of the total drop thanks to weaker results in the jobs report. Since the September 5th jobs report, rates have held a sideways-to-slightly lower range that’s resulted in several additional “lowest since” headlines. There’s nothing special about today in that regard. Bonds (which dictate rates) happened to improve, so rates inched to another 11+ month low. Today’s levels aren’t appreciably different than last Friday’s.  Volatility is a bigger risk over the next two days thanks to economic data tomorrow morning and the Fed announcement on Wednesday. 

“Someone posted that they had just made synonym buns. I replied, ‘You mean just like the ones that grammar used to make?’ I am now blocked.” That was sent to me by an economist; yes, they have senses of humor. Did you know that the Federal Reserve Board employs more than 500 researchers, including more than 400 Ph.D. economists, who represent an exceptionally diverse range of interests and specific areas of expertise? (I wonder if anyone yells, “Is there a doctor in the house?” at staff meetings.) This week’s focus will be almost entirely on the Federal Reserve. The central bank’s monetary policy committee will deliver its seventh interest rate decision of the year on Wednesday. The Fed has stubbornly held interest rates steady since ending 2024 with a series of cuts, but now with the labor market showing continued signs of cooling and inflation remaining sticky, it is a sure thing that the central bank will restart its policy easing process and drop overnight Fed Funds by 25 basis points, which in turn should move the discount rate lower (the rate at which the Federal Reserve lends money to financial institutions, including commercial banks, thrifts and credit unions). (Today’s podcast can be found here and this week’s are sponsored by CreditXpert. The all-new credit optimization platform that helps you close more loans. CreditXpert is committed to making homeownership more accessible and affordable for ALL. Today’s features an interview with Potomac Consulting’s Dan Varroney on why the Federal Reserve should cut rates 50-basis points this week due to weakening labor markets and recent inflation data.)