Where Will Rates Go From Here?

The Federal Reserve has been an active participant—as opposed to just a regulator—in mortgage bond markets all year. Beginning in January, they started buying mortgage bonds to help rates. This is the primary reason rates touched on record lows throughout the first two quarters of this year and remained close to record low levels since.

Rates are directly tied to mortgage bonds and rates change all day everyday as mortgage bonds trade. When bond prices drop in a selloff yields (or rates) rise, and when prices rise in a rally yields (or rates) drop. The Fed has been using their mortgage bond buying program all year to elevate mortgage bond prices which pushes rates down. They committed to buying $1.25 trillion of mortgage bonds throughout the year and have used up about 52% of that budget at this writing July 10.

It’s unlikely that we will see further significant rate drops because the Fed will continue to face more private selling pressure as they move deeper into their $1.25t budget. The longstanding money manager strategy is to buy agency mortgage bonds ahead of Fed buying and sell at a profit before the Fed does. The Fed’s mortgage bond budget might be enough to offset private selling but probably not enough to bring rates down drastically from current levels.

As open market and government forces clash and mortgage bond traders try to figure out what the Fed might do and where the economy might go, the result is wild daily and weekly rate swings. So if you see a rate you like when you’re ready to transact, you should lock that rate. Holding out for small gains can be expensive and stressful.