Rates Rise on Strong Employment Numbers

Perhaps we shouldn’t have asked how low rates could go last week. When such a question comes to mind, the answer is usually self-evident. In this case, mortgage rates were unlikely to go lower; they were likely to go higher instead.

We thought they could go higher. The imbroglio over the Brexit vote was already dying down. It wouldn’t take much positive economic news to get things moving, and that includes interest rates.

We received a positive piece of economic news last Friday. The employment numbers for June came in much stronger than anyone expected. Payrolls were up a whopping 287,000 for the month. This was a welcomed turnaround compared to the dismal 38,000 payroll increase in May. Somewhat paradoxically, the unemployment rate also rose, by two-tenths of a percent to 4.9%. This is actually good news. It reflects an increase in labor participation and a decrease in the number of discouraged workers.

Interest rates were given an additional boost when officials at the Bank of England surprised financial markets by holding off cutting interest rates. Analysts expected the BoE to cut rates because of uncertainty and an expected economic slowdown as a result of the Brexit vote. BoE officials said that they would give it another month to assess Brexit’s economic impact.

Financial markets were receptive to the BoE’s actions and outlook. It’s becoming clearer that the Brexit vote will be less damaging to the U.K. economy than initially predicted, hence the delay in cutting interest rates. At the same time, BoE officials said that monetary policy will remain accommodating to financial markets.

Good news generally manifests in higher interest rates. Good news motivates investors to sell haven investments, like U.S. Treasury securities and precious metals, and buy riskier investments, like stocks.  Over the past week, the yield on the 10-year U.S. Treasury note has risen 15 basis points. Stocks are again trading near an all-time high.

Mortgage rates, most notably those on the 30-year fixed-rate loan, also moved decisively higher. This is no surprise. As the yield on the 10-year Treasury note goes, so goes the yield on mortgage-backed securities, and so goes mortgage lending rates.  

For the immediate future, there is no great impending concern to weigh on financial markets. Therefore, we wouldn’t be surprised to see lending rates trend a bit higher.

To be sure, someone is always worried about some possible impending doom somewhere. That’s always the case. But if you were to ask us where mortgage rates will be this time next week, we’d say either flat to slightly higher.  For now, everything looks calm and steady (relatively speaking). Rates rarely move lower when things are calm and steady.

Information provided by Jessica Regan.

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