Mortgage and other interest rates powered higher again last week, but the proximate cause wasn't a spike of inflation, more tightness in the labor market or a sudden surge in economic activity. Rather, the increases were caused by concerns about good old supply and demand, with those compounded to a degree by a considered opinion about America's ability to manage its debt.
With significant budget deficits to cover, the Treasury announced its quarterly refunding needs this week, and the expected borrowing for the July-September quarter was pegged at one trillion dollars, up by $274 billion from the previous quarter. Supplies of new bonds were already running at very high levels, and even if there is enthusiastic demand for the increase in supply, it is likely too much for investors to want to readily absorb. More bond supply into uncertain demand is a recipe for higher yields, and higher yields we got.
While mortgage rates are elevated, it's not likely we'll see much by way of routinely increasing demand for home loans anytime soon. Another 3% decline in overall requests for mortgage credit was seen in the week ending July 28, according to the Mortgage Bankers Association. The overall figure was pulled downward by a 3.2% drop in applications for purchase-money mortgages (third weekly decline in a row) and a 2.5% drop in requests for funds to refinance existing mortgages, a second consecutive easing.
Between the last and the next Fed meetings, there are two full months of data for the central bank to consider. With one of the most significant weeks of new data now behind us, the early news is very favorable in terms of keeping the Fed from considering another hike in rates (currently reckoned by futures markets to be about a 12.5% chance). Of course, there's a lot more data yet to come, and it will likely all need to continue to be in the "favorable" vein for the Fed to stand pat in September or beyond. The next test comes right up this week, when the Consumer and Producer Price indexes for July are released. These aren't the Fed's favorite measures of prices, but are widely followed and certainly indicative enough as to what's happening with costs across the economy. In addition to those, there are a few other useful indicators due out, too.
Markets spent much of the week on edge, what with massive refunding plans from the Treasury, the credit rating downgrade for U.S. debt and worries that a blockbuster employment report might see more pressure for the Fed to continue to hike rates. Those fears were at least partly allayed by the mellow tones of the ISM reports and certainly by the stronger productivity and softer employment reports. That sign of relief sparked a fair decline in the yield of the 10-year Treasury on Friday, erasing at least some of the run-up in yields, which ran from about 3.93% midday Monday to as high as 4.19% early Friday. The closing yield retreated to about 4.05% late Friday, still up for the week overall, but at least by a lot less than had been the case.
Which brings us into the rate outlook for this week. The recent upward pressure on mortgage rates was only partly expressed in Freddie Mac's data this week, as their previous-Thursday-to-this-Wednesday survey week missed the worst of the bond-market selloff. Some of that uptick still remains, but most of it may wash out of the market by the time Thursday rolls around and new survey data becomes available. With the CPI and PPI coming out Friday, those reports won't play a role in this week's mortgage rates, at least as far as Freddie's survey is concerned.
Given all that, there's a good chance that there's only a slight residual bump in mortgage rates at most for the week, and if the bond-market rally of Friday can carry, a chance of stable or even slightly lower rates, as well. We'll hedge those possible outcomes and expect an increase of perhaps a basis point or three in the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac Thursday at noon.