What’s driving current mortgage rates?

Most mortgage rates today are a mixed bag, with short-term rates going up and long-term rates going down. This indicates a flattening yield curve, in which short-term rates are nearly equal to long-term rates. This usually indicates that investors don’t believe that interest rates will rise much in the long-term. However, today’s economic reporting does indicate rising rates right now. Weekly Jobless Claims fell by 4,000 claims to 218,000 this week, And Retail Sales increased by .8 percent, topping the previous month’s .3 percent and analysts expectations of a .4 percent rise. Both numbers indicate better economic performance and rising rates.

Financial data affecting today’s mortgage rates

Today’s data are mostly neutral or slightly bad for mortgage rates.

Major stock indexes are up very slightly (slightly bad for mortgage rates) Gold prices rose $7 to $1,307 an ounce. (That is good for mortgage rates. In general, it’s better for rates when gold rises, and worse when gold falls. Gold tends to rise when investors worry about the economy. And worried investors tend to push rates lower) Oil prices increased $1 to $67 a barrel (that’s bad for rates because energy prices play a large role in creating inflation.) The yield on ten-year Treasuries stayed at 2.96 percent. That is neutral for mortgage rates because mortgage rates tend to follow Treasuries. CNNMoney’s Fear & Greed Index stayed at 65 (out of a possible 100). That is unchanged and neutral, but we’re firmly in the “greedy” range. “Fearful” investors generally push bond prices up (and interest rates down) as they leave the stock market and move into bonds, while “greedy” investors do the opposite.

This week

This week has some moderately-important reporting, with the biggest day being Friday. Borrowers and lenders will also look for interest rate clues in global political news and White House tweets. Only reports that vary significantly from expectations will likely affect rates. Monday: April Factory Orders (forecast: -.6 percent) Tuesday: Consumer Price Index and Core CPI Wednesday: Producer Price Index (previous: .1 percent increase) Thursday: Weekly Jobless Claims (previous: 222,000 claims) and Retail Sales (previous: up .3 percent) Friday: Consumer Sentiment (previous: 98), probably the most important report of the week

What causes rates to rise and fall?

  Mortgage interest rates depend on a great deal on the expectations of investors. Good economic news tends to be bad for interest rates because an active economy raises concerns about inflation. Inflation causes fixed-income investments like bonds to lose value, and that causes their yields (another way of saying interest rates) to increase. For example, suppose that two years ago, you bought a $1,000 bond paying five percent interest ($50) each year. (This is called its “coupon rate.”) That’s a pretty good rate today, so lots of investors want to buy it from you. You sell your $1,000 bond for $1,200.

When rates fall

The buyer gets the same $50 a year in interest that you were getting. However, because he paid more for the bond, his interest rate is now five percent. Your interest rate: $50 annual interest / $1,000 = 5.0% Your buyer’s interest rate: $50 annual interest / $1,200 = 4.2% The buyer gets an interest rate, or yield, of only 4.2 percent. And that’s why, when demand for bonds increases and bond prices go up, interest rates go down.

When rates rise

  However, when the economy heats up, the potential for inflation makes bonds less appealing. With fewer people wanting to buy bonds, their prices decrease, and then interest rates go up. Imagine that you have your $1,000 bond, but you can’t sell it for $1,000 because unemployment has dropped and stock prices are soaring. You end up getting $700. The buyer gets the same $50 a year in interest, but the yield looks like this: $50 annual interest / $700 = 7.1% The buyer’s interest rate is now slightly more than seven percent. Interest rates and yields are not mysterious. You calculate them with simple math.