The MBS markets are about 50-60 basis points better in price than yesterday morning. The financial markets continue to have daily price volatility as the markets try to determine their new equilibrium point under a Republican government for at least the next 24 months. The two biggest issues that will determine the future direction of mortgage rates will be the future direction of inflation and the future size of the Federal budget deficit.
As the Trump administration’s selection of leaders of key Federal positions become known, and these leaders begin to assemble their teams and convey their priority objectives, the markets will try to determine the resulting impact to inflation and the Federal budget deficit, which will then impact bond prices, with the impact to MBS bond prices being the key to the direction of future mortgage interest rates.
The cost of housing was a top election issue in virtually all 50 states, and the lack of supply is a key driver of the high cost of housing. Effective strategies to address the supply issue will be a dominate industry issue in 2025. Entities such as the Mortgage Bankers Association (MBA) will be highly engaged along with other housing industry housing policy participants to work with government officials to help drive solutions to housing supply and affordability.
The Federal Reserve will announce their decision on any cuts to the Fed Funds rate today at 2:00 pm ET. The Fed Futures market predicts a 99.6% probability of a 25 basis point rate cut. As a reminder, the Fed Funds is the interest rate for 1-day loans between Fed member banks. Changes in this rate directly impact the cost of short-term borrowings, but do not directly impact the cost of longer-term bonds, such as the 10-year Treasury bond or the MBS market. Today’s Fed decision is not likely to have any impact on the MBS market or mortgage rates, unless they make a surprise announcement of a zero-rate cut. The 10-year Treasury bond is presently 4.357% which is down about 6 basis points from yesterday morning. Below is the graph of the yield on the 10-year Treasury over the last five trading days.
Election Impact on Mortgage Rates. This is the question everyone is asking, and nobody yet has the answer to. The answer will depend on the future level of inflation rates and the level of future Federal budget deficits.
If bond investors believe long term inflation rates will be higher, this will create a 1:1 increase in longer term bond yields so that investors can earn their targeted levels of return, above the rate of inflation. Increased government spending does create an upward pressure on inflation rates, as the government is hiring people and buying goods when they spend money.
If the Federal budget deficit continues to grow, this will require the Treasury to issue more bonds to finance the growing deficit. The increased supply of bonds will push down bond prices through the normal market principles of supply and demand. Lower bond prices mathematically push up bond’s yield, which is why mortgage interest rates will go higher if MBS prices go down.
As the Trump administration names the new leaders for Treasury, HUD, Ginnie Mae, FHFA and the CFPB, who then begin to lay out their policy objectives, the markets will attempt to estimate the expected impact to inflation rates and the budget deficit. If the Trump administration can cut government spending and at the same time maintain or increase tax revenues, then the budget deficit will shrink, and this would create a downward pressure on mortgage rates.
Federal Reserve. The Federal Reserve’s Federal Open Markets Committee (FOMC) is meeting today for the second day of their normal two-day regularly scheduled meeting. The markets expect the Fed will announce a 25 basis point cut to the Fed Funds rate, bringing the level down to 4.50%. The Fed Funds rate had rapidly increased from zero to 5.25% as of July 2023 and starting in this past September the Fed has said they would like to bring them down to a more “neutral” level that the markets believe will be in the 3’s. The markets are currently estimating the Fed wants to bring the rates down to about 3.7%, and just 30 days ago, the markets were thinking the Fed would drop them to about 3.2%. How fast and how far the Fed drops the Fed Funds rate will depend on future inflation rates and the health of the labor market. The Fed is trying to prevent sharp contractions in the labor market that result in many people losing their jobs.
The Fed Funds rate is the rate for 1-day loans between banks who are members of the Fed system. The Fed Funds market provides a source of short-term funding for banks, to supplement their other funding sources such as checking and savings accounts. By controlling this rate for 1-day loans, the Fed can impact the cost of funds for banks, and this can spur or curtail banks lending activity for loans they would normally hold in their portfolios.
Today’s likely announcement of a 25 basis point rate cut should have no impact on MBS prices, as this information has already been built into this morning’s price levels for MBS bonds. This cut will have an immediate benefit for borrowers with HELOCs based upon the prime rate.
Veterans Day Holiday. As a reminder, Guild will be closed all day on Monday in observance of the Veterans Day holiday. Normal rate sheets will not be posted, however, or normal weekend and evening “night owl” rate sheets will be posted if you have a borrower who needs to lock their rate on Monday.
This Market Update and similar such communications are for informational purposes only and are based on publicly available information. These materials are general communications, which are not impartial, and are provided solely for discussion purposes, and not in connection with any product or service offering. The opinions and views expressed in this Market Update are as of the date of this communication and are subject to change. Any forward-looking views and statements contained in this Market Update are based on current estimates or expectations of future events or results. Actual results may differ materially from those described in this Market Update. The views expressed in this communication should not be attributed to Guild Mortgage Company as a whole and may not be reflected in the strategies and products offered by Guild Mortgage Company.
