Mortgage rates hit their highest levels in months yesterday as bonds lost ground at a brisk pace to start the new week.  Bonds--specifically mortgage-backed securities (MBS)--are the most important ingredient used by lenders to determine mortgage rates.  Bond market weakness (i.e. "losing ground") means that bond PRICES are falling.  Bond prices vary inversely with bond yields, and yield is just a fancy term for "rate." 

In simpler terms, bond sellers had to offer higher rates of return to attract reluctant buyers.  

But why are bonds struggling?  This is actually a general trend for bonds and rates for just over a year as the economy battles back against covid.  The middle of 2021 was a bit of an aberration as the delta variant brought new pandemic-related uncertainty to financial markets.  But now that case counts are once again dropping steadily, rates are back to doing what they've generally always done when covid looked to be on the run.

Mortgage rates had a mixed showing last week.  They started out high before improving through Thursday.  Finally, they took a step back up on Friday.  Now at the start of the new week, the upward momentum is continuing.  The bond market was much weaker in overnight trading, and weaker bonds mean higher rates, all other things being equal. 

Bonds hit their weakest levels just before the average mortgage lender released rates for the day.  As such, the average conventional 30yr fixed rate quote was the highest in roughly 4 months.  

As the day progressed, bonds found their footing to some extent.  It was enough for most lenders to offer mid-day improvements to rates.  Keep in mind though, these improvements are generally small.  They mean today's rates are lower than they were this morning, but still noticeably higher than Friday.  

After a calm summer at historic lows, interest rate volatility has ramped up heading into the fall. What are rates worried about, and is this just the beginning of more drama?

In a word: maybe! 

Because they're based on bonds, rates are always worried about anything that can have a big impact on the supply/demand equation in the bond market.  

Since March 2020, virtually any major supply/demand consideration can be traced back to the pandemic in some way.  In general, the worse the outlook is for covid, the higher the outlook is for rates.  

Mortgage rates fell today as a majority of lenders finally got caught up with the past few days of strength in the bond market.  Lenders rely on bonds--specifically mortgage-backed securities (MBS)--to determine where to set mortgage rates.  Bonds are constantly on the move, but lenders prefer to just set mortgage rates once per day, if possible.  As such, when volatility is higher and when rates have been rising more than falling, lenders tend to be more defensive.  In other words, they need to see more sustained improvement than normal before bringing rates back down.

Today's improvement was the biggest of the week, and it brings the average conventional 30yr fixed quote well below those seen at the end of last week.  Even so, there are numerous news articles out today proclaiming "sharply higher" rates.  What's up with that?  As is often the case on Thursdays, the mixed signals result from Freddie Mac's weekly mortgage rate survey which tends to measure Monday/Tuesday rates vs the previous Mon/Tue before finally publishing the results on Thursday at 10am.  

Closely following intraday moves for the bond market and mortgage rates means that seemingly insignificant time frames are actually important.  For instance, it's actually not too common for rates to make it more than 5 business days without falling at least once--even if only slightly.  Thankfully, today's modest drop in rates puts an end to just such a streak (rates hadn't improved since last Monday).

In a way, this improvement was almost "owed" to prospective mortgage borrowers considering yesterday's counter-intuitive results (higher rates despite bond market gains).  For a few moments this morning, it wasn't entirely clear that we would see any improvement.  Bonds initially balked at an inflation report released this morning (spoiler alert: it's still high), but were ultimately able to find their footing.  Positive momentum continued into the afternoon after a well-received auction of 30yr Treasury bonds.  

Mortgage rates continued higher on Tuesday after reaching the highest levels in months by the end of last week.  The bond market was closed on Monday, which meant today was the first time most lenders updated their mortgage rate offerings since Friday.  

Although bonds are most directly responsible for the day-to-day movement in mortgage rates, we don't always see a logical correlation between the two over the short term.  For example, bonds are actually in better territory today (something that implies lower rates).  

So why are rates higher yet again?  

It goes by many names: The Employment Situation, Nonfarm Payrolls (NFP), or simply "the jobs report." No matter what you call it, the Labor Department's massive collection of employment statistics is one of the most important events for the bond market every month.

For a quick reminder as to why mortgage rates care about the bond market, here's a chart of relative movement in the average 30yr fixed mortgage rate and 10yr Treasury Yields (the quintessential bond market benchmark).

You may notice that rates have been moving higher recently, and that's where our journey intersects with Friday's jobs report.  In short, the government's official job tally of 194k (new jobs created) fell extremely short of the median forecast calling for 500k. 

It's Thursday and thus time once again for some seriously confusing mixed signals in the world of mortgage rate journalism.  The weekly Freddie Mac rate survey is the most widely-cited source material for a majority of the mortgage rate coverage in the news.  For the average consumer, it works just fine because it does a good job of capturing broad trends over time without too much noise.

But for those with a vested interest in day-to-day movement (those in the process of buying or refi'ing perhaps?), Freddie's numbers run the risk of being downright misleading depending on what the bond market is doing.  The reason is simple: there's a lag of several days between Freddie's data collection and the press release.  In practice, the survey ends up doing a great job of measuring Monday vs Monday mortgage rates, despite being reported on Thursdays.

Mortgage rates managed to hold mostly steady on Wednesday despite several headwinds that threatened to push them higher. 

The first headwind falls into the very broad category of "momentum in the bond market."  Lenders set their rates each morning based on trading levels in the bond market, and bonds have generally been doing poorly over the past 3 weeks (i.e. pointing toward higher rates).  In fact, bonds were at their weakest levels in months at one point in the overnight hours, but things changed as trading ramped up domestically.  

The second headwind was the stronger-than-expected result in this morning's ADP Employment report.  This data is viewed as one of several predictors of the all-important jobs report that comes out on Friday.  While the correlation between the two is hit and miss, when ADP's numbers are significantly different than forecasts, the bond market tends to react.  

Mortgage rates managed to begin the week by holding relatively steady, but that changed rather noticeably today.  The bond market (which dictates day to day rate movement) was somewhat weaker to start the day.  This implied higher mortgage rates and that is indeed what we saw this morning.  

Unfortunately, bonds were not done losing ground.  After an important report on the services sector came out stronger than expected, bonds continued to deteriorate.  When bonds lose enough ground in the middle of a trading day, mortgage lenders occasionally make mid-day adjustments to their rate offerings.  Today was one of those days.  

Mortgage rates are unchanged to a hair lower compared to last Friday, depending on the lender.  While that's welcome news given some of the big jumps in rates seen in the past 2 weeks, the underlying bond market suggests we're still in the middle of a waiting game.  

Although rates are ultimately dictated by movement in the bond market, there can be a delayed reaction at times--especially when the market is more volatile.  This was the case last Thursday.  Bonds improved noticeably in the afternoon, but lenders didn't pass the improvement along until Friday.  Friday's improvement would have been seen in today's rates, but bonds are in worse shape today.  

In other words, mortgage rates are still getting caught up to Friday's bond market improvement, and today's bond market weakness more-or-less cancels out that improvement.

The conforming loan limit is set by the Federal Housing Finance Agency (FHFA). Mortgages under that amount generally have the lowest effective rates, and in some cases are easier to qualify for.

With prices appreciating rapidly in the past year, a big increase in the loan limit would be big news.  Prospective buyers would be able to widen their price range in many cases and homeowners whose loans exceed the previous loan limit might be able to refinance to  a lower rate.

It shouldn't come as much of a surprise, then, that word has quickly spread about the earlier than normal increase of the conforming loan limit from $548,250 to $625,000.

There's just one problem: nothing has changed yet!  The conforming loan limit is still $548,250 and it will continue to be $548,250 until November 30th at the very earliest.  

So why have people been talking about $625k?

After spending the past four business days moving rapidly higher, mortgage rates finally caught a break today, but it was small. In fact, the average prospective borrower wouldn't likely see any change in their actual mortgage rate.  Rather, the improvement--if any--would be seen in the form of slightly lower upfront costs or a slightly higher lender credit, depending on the scenario.

As we discussed yesterday, this sort of bounce was increasingly likely based on typical patterns in the bond market (mortgage rates are based on bonds).  That really doesn't carry much weight in the bigger picture, however.  This is more of a token improvement--an incidental necessity.  Bond traders have been focused on screaming at the sky and today they had to pause for a breath. 

Could this simply be the first glimpse at a bigger reversal toward lower rates?  Sure!  Even the mightiest rate reversals have to start somewhere.  But nothing about today's bond market improvement suggests that's a strong possibility.  Bottom line: we'd need to see several more days with much better gains before getting too optimistic.

The headline requires a bit of context.  The target audience would be those of us who keep tabs on every little move in mortgage rates.  If you identify with that crowd, you've seen rates jump higher at the fastest pace since February following a series of uncommonly weak trading days in the bond market.  

When bonds (which dictate rates) lose this much ground in rapid succession, it's increasingly common to see a push back in the other direction.  In fact, on several occasions in the past few months, bonds have lost ground on the days leading up to a series of monthly Treasury auctions only to recover after the auctions concluded.

Today marked the conclusion of the most recent round of Treasury auctions, but bonds showed no signs of improving (weaker bonds = higher rates).  The average mortgage lender is now at least a quarter of a point higher than last week when it comes to conventional 30yr fixed rates.

Mortgage rates continued somewhat higher on Monday as bond markets lost ground over the weekend, adding to the heavier losses seen on Thursday and Friday last week.  Bond market weakness equates to higher rates, all other things being equal. 

Last week was the worst for rates since late February.  At that time, bonds were losing ground at the fastest pace since November 2016, and we'd need to go back to the original "taper tantrum" in 2013 to see anything definitively worse.  The early 2021 rate spike was driven by a rapidly improving outlook in the fight against covid.  It was only when case counts stopped dropping that rates leveled off.

Now in late September, case counts have begun to drop fairly quickly.  This improves the outlook for the economy and further steels the resolve of the Federal Reserve to announce another instance of "tapering"