The bond market and interest rates have arrived at the first full week of the new year almost exactly where they left off before the X-mas/New Year holiday weeks.  There was a small amount of underlying volatility in bonds today, but not enough to translate into volatility for mortgage rates.  This kept the average lender near 7.125% for a top tier conventional 30yr fixed rate.

Although the past 2 weeks have been uneventful for rates, the next 2 weeks will be heavily influenced by incoming economic data.  There are several honorable mentions over the next few days before getting to this week’s headliner on Friday: the jobs report. 

The data between now and Friday is certainly capable of causing movement in either direction, but the jobs report is capable of causing much MORE movement.  In all cases, bigger volatility requires a bigger deviation from the market’s expectations.

Where do expectations come from? Hundreds of economists/analysts submit or publish forecasts for most of the regularly-scheduled economic data.  The median of those forecasts is then published as a consensus–effectively THE forecast.  In general, if the data suggests the economy is weaker or inflation is lower versus the forecast, it’s good for rates.

Interest Rate Outlook.  It is still too early for the markets to have enough data to make high quality interest forecasts for 2025 and 2026. After Trump is inaugurated, his nominees for key government positions will begin to go through the Senate confirmation process. As the names of these nominees become known, and they begin to make public statements on their policy objectives and strategies, the markets will attempt to predict the impact on inflation and the size of the Federal budget deficit. The markets will continue to refine their interest rate forecasts as nominees are officially confirmed and begin to provide greater detail on their expected actions.

We will likely see increased daily MBS price volatility during the next few months as nominees are named, approved and begin to implement their policy strategies. The answer to the question of where mortgage interest rates will go in 2025 and 2026 will mostly depend on the direction of inflation and the size of the Federal budget deficit which directly impacts how many Treasury bonds must be issued to fund the deficit.

Fed Funds Rate Outlook.  The Fed Futures market is predicting that the Fed Funds rate will not be cut again until this June. The futures market is predicting a 9.2% chance of a rate cut this month, a 49.2% chance that the next cut could be in March, and a 102.4% chance that the next cut will happen by June.

As a reminder, the Fed Funds rate is set by the Federal Reserve and only applies to one-day loans made between banks who are members of the Federal Reserve system. Banks who have surplus daily cash reserves can do overnight loans to banks who are short of their daily cash reserves and this market essentially provides banks with access to one-day, short-term funding sources. Changes in the Fed Funds rates directly impact short term interest rates such as the Prime index used on most HELOCs, but changes to the Fed Funds rate typically have little or no impact on longer term interest rates, such as the 10-year Treasury bond or 30-year fixed rate mortgages. The future path of inflation is one of the most important items focused on by long term bond investors as they want to earn a net return on their bond investment that is above the rate of future expected inflation. As inflation expectations go up or down, this can cause an immediate increase in the yields or rates on long term bonds.