Mortgage rates are a tad bit worse today heading into the Fed’s October meeting.
Most notably, the bellwether 10-year bond yield is back above 5% with traders likely playing some defense.
The 10-year acts as a benchmark for the 30-year fixed mortgage, so expect rates to tick up a bit if this holds.
However, this has been a super flat week for mortgage rates, one of the dullest in recent memory.
But it tells you this could be a pivotal week where we finally see real improvement or rates return to their rising trend.
The Bellwether 10-Year Bond Yield Is Back Above 5% Ahead of the Fed
As noted, bond yields are on the rise again, with the 10-year up about four ticks to 5.03%.
That’s the first time it’s been over 5% for a week and could be a sign of things to come depending on what Fed speak and economic data we get today and tomorrow.
If 10-year yields are back above 5%, it means traders aren’t all that eager to buy bonds at current levels.
That trend has kept pressure on mortgage rates for the past month and change, and could lead to another leg higher if the underlying data reinforces the move.
We’ve got the Fed’s favorite PCE report being released tomorrow alongside GDP, along with a Fed meeting complete with presser afterwards with new Fed chair Kevin Warsh.
Warsh can calm markets if he says the Fed is holding because it believes inflation is mostly energy-driven.
But he can do the opposite if he says it’s more widespread and entrenched, and that more hikes are likely coming.
So that’s something to look out for in the post-meeting press conference. Is he dovish or hawkish? The Fed holding is a certainty, so that’s the only real takeaway to keep an eye on.
Ultimately though, their decision will depend on the economic data, as it always does.
The Fed simply follows the data, so if those reports come in hotter-than-expected, you should expect higher mortgage rates.
If they’re cooler-than-expected, we might see the 30-year fixed fall closer to the low-7s again.
Is the Bond Market Playing Defense Ahead of Inflation Data and Tech Earnings?
Here’s my take. Bond yields are probably higher because of what’s coming tomorrow (and after the market closes today).
Aside from that fresh inflation report tomorrow, we’ve got major earnings announcements coming from Alphabet and Microsoft.
Leading up to the earnings release, Microsoft announced buyout offers to 60,000 employees, which paints a grim picture.
The move is to reduce costs so it can continue to fund its “massive AI investments.”
This too is a theme to pay attention to with regard to the bond issuance that can crowd out investment in things like mortgage-backed securities (MBS).
Back in the early 2000s, high-yielding MBS were the darling of the market and received tons of demand from investors.
Today, investors aren’t too interested in MBS and are instead chasing higher yields on bonds tied to the AI buildout.
If these tech giants express that AI is fizzling, or financing the enormous costs is becoming a problem, you could see another flight to safety in government bonds and MBS.
That’s what got mortgage rates off their highs to begin with over the past couple weeks.
Conversely, if AI investment is back on again, we might see Treasuries, MBS, and mortgage rates rise again as yields must climb to boost demand.
That’s what we’ve seen this week. AI is all of a sudden hot again and so are the related stocks, which could begin to push bond yields back up if nobody’s buying.
In the process, mortgage rates could march higher again too.
Read on: How are mortgage rates determined?
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