Much has changed in the global political climate, as there is now open war in the Middle East. As many folks know, bad news somewhere in the world often leads to lower interest rates here in the U.S., as investors look to move whatever funds they can into the relative safety of U.S.-backed debt. This was the case again last week, at least for a time, as the yield on the highly influential 10-year Treasury dropped sharply, then partially retraced its decline only to fade again as the week came to a close.
Higher mortgage rates continue to be a strong headwind for housing and mortgage lenders, but sometimes the need to get a deal done just can't wait any longer. That was likely the case in the week ending October 6, when applications for mortgages increased despite mortgage rates moving higher. The Mortgage Bankers Association reported an overall 0.6% increase in requests for mortgage credit, lifted by a 0.7% increase in those for purchase-money mortgages, which was surprisingly joined by a 0.3% gain in those to refinance existing loans. Despite the adverse rate climate, there can still be good reasons to refinance, even at a higher interest rate than an existing loan has.
The outbreak of war in the Middle East adds another level of uncertainty to the outlook, not that it was ever all that certain to begin with, what with war already running in Ukraine and dysfunction in the fiscal and political system here on full display in recent weeks. This new uncertainty should see investors at least considering sheltering funds in safe havens, and that would generally help to damp if not reverse the considerable upturn in bond yields and mortgage rates over the last three months. However, it would take even more desperate times to reverse much of the full percentage point rise in the 10-year Treasury since mid-June, and no one should wish for such times to come.
The decline in yields from this new uncertainty is counterbalanced by inflation that, like the overall economy, is proving resilient. Yes, the inflation picture has improved, but not enough, and progress on containing price pressures seems to be becoming halting at best. If inflation is viewed by investors as less contained or less containable, yields will press higher, even as the prospects for additional rate hikes by the Fed keep the financial markets in a heightened state of wariness and diminish the chances for lower rates to come anytime soon. Incoming data over the next month or so will be very important in influencing these perceptions.
Given the volatility, it's harder than usual to predict what mortgage rates may do this week. Yields are lower than where they started last week but above their lowest point, and there's no telling what may unfold overseas in the coming days. There's plenty of new data coming on the economic calendar, but the focus is rightly elsewhere right now. Based purely on the trend for yields over the past week, it seems likely that mortgage rates will decline this week, breaking a five-week string of increases. We'll call it a six to eight basis point decline in the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac come Thursday at noon.