Market analyst discusses how uncertainty could impact rates
After an ugly Monday in the Treasury markets, it appears the markets are taking a breath today and stabilizing.
The 10-year Treasury had reached its lowest point since October at the end of last week, pushing mortgage rates into the high 5s for the first time in four years. There was optimism that rates might continue to fall.
However, Saturday saw the United States and Israel launch a war against Iran, and Treasuries shot back up on Monday, pushing mortgage rates back into the low 6s.
By midday Tuesday, the 10-year had leveled off for the day after a surge early in the day. The 10-year Treasury hovered around 4.06%, still well below the year-to-date high of 4.31%. However, the volatility paused the excitement around mortgage rates in the 5s for the time being.
It’s been an eventful two months with the Treasury market, and one market analyst said that while some increases in rates could be good for some lenders, it’s not good for brokers who are looking for a stronger spring buying season.
Eric Hagen (pictured top) is the managing director and mortgage and specialty finance analyst at BTIG. He discussed how the first two months of the year have left the market spinning, starting with President Donald Trump ordering Fannie Mae and Freddie Mac to buy government bonds, forcing rates lower.
“The MBS announcement from Trump at the beginning of January was totally unprecedented,” Hagen told Mortgage Professional America. “And so all these things have come to a head. I mean, it was nice to see mortgage rates below 6%. We feel like they can hang around that level. But rates went back up Monday.”
Pressure on Treasuries
Hagen said that an increase in rates can improve the quality of loans for lenders. However, for a stagnant housing market, a more substantial rate decline is needed to spur activity.
“The one thing we'll say with rates backing up is that it does tend to be constructive in some ways for mortgage lenders,” Hagen said. “If the yield curve is steeper, we feel like the flow of mortgage capital is higher quality. It's better when the yield curve is steeper. Lenders are usually given more of an incentive to borrow short and lend long when that's the case.
“We do, however, feel like rates need to go lower. The 10-year needs to go below 4% in order for there to be real activity in housing. And we still believe that.”
While the Trump administration was able to help push rates down early in the year with the mortgage-backed securities purchase, Hagen doesn’t see room for another big purchase.
“It's nice to see them hovering around 4%, but I feel like Trump can't really do a whole lot else within the secondary market to drive rates lower,” Hagen said. “There's still room for more mortgage spreads to tighten, but the real emphasis, the real thrust of rates falling needs to come from the 10-year coming down.”
Where rates are heading
While the 10-year Treasury going back above 4% is something nobody was looking forward to on Monday, Hagen is hopeful that we won’t see a spike as high as 4.5%.
“My hunch is to say that rates will stay below 4.5% over the near term, or the relative near term,” he said. “We do feel like war in the Middle East will generally encourage investors to look at risk-free options to take risk off, and mortgages are a source of that.”
Hagen does see more volatility in the market, which could lead to higher mortgage rates in the short term. However, he thinks that the 30-year mortgage rate will stay within shouting distance of 6%.
“Interest rate volatility is what really drives mortgage rates, and to the extent that this leads to more volatility, we feel like rates are going to go up,” Hagen said. “That would be driven by spreads going wider, not necessarily Treasury rates going up.
“I would like to say that mortgage rates can stay below 6.25%. I feel like that's a benchmark that we can put some odds around. I feel like the odds are pretty good that it will stay below that. Going down to 5.5%, on days like Monday, it's harder to see that just because the 10-year is making big moves.”
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