Mortgage Rates End Week Lower Despite Higher Rate Expectations June 11, 2010

Mortgage Rates End Week Lower Despite Higher Rate Expectations  June 11, 2010

Mr. Toad’s Wild Ride

One of Disneyland’s oldest rides is an adaptation from the movie, The Wind in the Willows. The ride features a series of crazy twists and turns as it moves through the landscape from the movie. Mortgage rates have been on a wild ride of their own this week through the landscape of economic data, domestic and international governmental reports, private surveys and quotations from officials. Mortgage rates will end the week slightly lower than last week, so I guess that makes the ride worth it. But it sure was wild.

Unmet Expectations = Market Reaction

When something is expected by market analysts and traders and then doesn’t happen, there is a strong reaction, either positive or negative in our markets (stock and bond). The beginning of the week was met with expectations for a rebound in the stock market after the previous Friday’s big losses. When this did not occur by midday on Monday a selloff of stocks and a flight to the safety of bonds occurred. This brought mortgage rates down. We also witnessed a drop in the value of the euro currency that became the next big mover of the markets. Despite good economic news and positive comments from Federal Reserve Chairman Ben Bernanke, mortgage-backed securities continued to be very popular with investors. This is opposite of what is normally expected and resulted in continuing rate improvements on Wednesday afternoon. On Thursday positive economic news from the US, China and Japan, along with stabilization in the euro currency, delivered big stock market increases and bond market weakness. This brought higher mortgage rates by the end of Thursday.

Finally, on Friday expectations were for mortgage rates to begin the day better. This was indeed the case and conditions improved even more by midday after a weak US retail sales report. Despite stock market recovery by the end of the day, the bond market was able to hold on to higher prices by the close of business. Consequently, mortgage rates were able to close at their lows for the week.

Next Week

Next week’s mortgage rate movement will be guided by two reports on inflation in the US. The Producer Price Index (PPI) and the Consumer Price Index (CPI) measure increases in prices to manufacturers and consumers. Signs of inflation would be bad for mortgage rates, but only modest inflation is expected.