Mortgage rates rose .125% today, which is a huge one-day spike that came after the Fed hinted it might soon slow bond buying they do to support lower rates. Here’s what all that means in simple terms.
– When the economy crashed in Winter 2008-2009, the Fed began buying mortgage bonds (in January 2009) to keep rates low, and they’ve been doing it since.
-A bond pays an investor a rate of return, and that rate is inversely tied to a bond’s price. If you pay less for a bond, the rate of return is higher. And if you pay more for a bond, the rate of return is lower.
– So the Fed started buying bonds to prop up bond prices, which then keeps rates low.
– They’ve tried to “taper” off their bond buying a couple times since 2009, and when they do, bond markets sell off.
– And when bond prices drop in a selloff, rates rise.
– That’s what happened today because the Fed indicated it might start tapering soon. Bond market participants think it could happen by year-end, but these folks always sell first and ask questions later.
– As a homebuyer, if you’re trying to stretch your budget to win a bidding war for a $400,000 home with 20% down, today’s rate spike adds $33 per month in interest cost (and makes your payment $23 per month higher).
– To some, this breaks budgets. To others, it’s not terrible, but it raises the question: is this the beginning of a trend toward higher rates as we enter the second half of 2021?
My friend Matt Graham is a bond and rate market analyst, and he’s got the answer for today below. More to come on this maybe-trend. Comment below or reach out directly with questions.
It remains to be seen whether today is the beginning of rates trending higher. While we could see this for a few more days, sustained momentum in one direction or another is thought to be more elusive until the Fall, when the Fed (and everyone else) thinks we'll have enough information about the economy to make bigger decisions.
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