Market Review - June 10, 2024

Market Review - June 10, 2024

As last fall's expectations by investors of multiple rate cuts by the Fed gave way to this spring's concerns that perhaps none were coming, interest rates have been trying to find a balancing point. With a peak of 7.79% last fall followed by a plummet to 6.61% to start the year, 30-year fixed mortgage rates seem to have found a perch somewhere between the upper 6% and lower 7% range over the last eight weeks or so.

It's worth considering that nearly all the decline in fixed mortgage rates has come because of spreads narrowing over time. Late October 2023's 20-odd year peak for mortgage rates (7.79%) saw a spread as wide as 301 basis points the next week, a figure among the widest seen in the Fed post-pandemic MBS runoff. Through the week ending May 31, the average 30-year FRM was 7.03%, down 76 basis points from peak. With the spread between the yield on the 10-year Treasury and the average offered 30-year FRM now just 248 basis points, the 53 basis point reduction accounts for more than two-thirds of the decline.

When rates do fall and refinances kick up again, the Fed's process of reducing its holdings of MBS adds a level of complication. Formerly, when redemptions of mortgages exceeded $35 billion per month (this hasn't yet occurred in this balance-sheet runoff regime) the Fed would then buy new MBS in any amount over this figure, and so help to absorb at least some new MBS supply. The Fed recently announced that it would be reducing its runoff of Treasury bonds but leaving MBS to run off at a $35B/month rate; however, it will now plow any inbound proceeds of more than $35B back into Treasuries, not MBS. As such, when refinancing does flare anew, there will be rather more MBS volume for investors to pick up, so we'll have to see how investors react to that, whenever those conditions do finally show up.

Requests for mortgage credit have slumped in recent weeks, and this was again the case in the week ending May 31, according to the Mortgage Bankers Association. To be fair, it was a holiday week and folks likely had other things to do than apply for mortgages with rates as elevated as they are. Still, there was a 5.2% decline in overall applications for mortgages, with the top line figure pulled down by a 4.4% drop in those to purchase homes. This was the fourth consecutive decline for this component. Refinancing activity was also off, dropping by 6.8% in the latest week after a 13.6% drop previously.

The Fed meets again this week to ponder the various tail-, cross- and headwinds that challenge the economy. There will be no change to monetary policy at this meeting, and none is expected to come. That said, all eyes will be on the updated Summary of Economic Projections, where Fed members provide their outlooks for growth, inflation, unemployment, and of course the likely path for interest rates for the remainder of 2024 and beyond. The March update pointed to a chance of up to three cuts in rates this year, but with inflation less well-behaved since March and now just a bit more than six months left in the year, odds favor that this outlook will be trimmed to one or perhaps two cuts before the calendar turns.

Signs of slowing growth have helped the influential yields that underlie mortgage rates to decline last week, and that should help improve mortgage rates heading into this week if the declines can manage to hold. Now, we think there's a good chance of an 8 to 10 basis point decline in the average offered rate for a conforming 30-year FRM as reported by Freddie Mac Thursday, pushing again to the more favorable side of the 7% line.

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