Mortgage rates increased for the fourth straight day on Tuesday, following Fed Chairwoman Janet Yellen’s congressional testimony. Bonds sold off quickly after Yellen’s testimony, as the head of the U.S. central bank said that it would be „unwise” to wait too long to hike rates. Although, she stepped back from indicating there would be a short-term rate increase at the upcoming Fed meeting in March, but at the same time she left the possibility of a rate hike on the table. In her semiannual report to the Senate Banking Committee, Yelled said that „At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.”
Markets reacted accordingly, as treasury yields spiked and closed the day at higher levels. The 10-year treasury bond, which is a bedrock of global finance, finished Tuesday’s trading session at a yield of 2.47%, an uptick of 4 basis points compared to data from a day earlier. The 10-year treasury yield is considered one of the best market indicators of where mortgage rates are heading. When the yield on the 10-year treasury bond rises, mortgage rates are often heading higher as well. On the other hand, when the yield on the 10-year bond falls, mortgage rates usually drift lower. The long-term 30-year treasury bond also closed the day at a higher yield in the form of 3.07%, which translates to a 4 basis points increase since Monday.
As far as mortgage pricing is concerned, lenders repriced for the worse following Yellen’s upbeats comments on the U.S. economy. The most prevalently quoted rate on the 30-year fixed mortgage is now back at 4.25%. However, bonds were able to recover some of the losses later on in the day, and rates improved as well, but still finished the day at higher levels compared to those a day earlier. The bottom line is that current mortgage rates are back to those higher levels seen in the beginning of February.
Pricing on mortgage-backed securities (MBS) are in the green this Wednesday morning, which could help today’s mortgage rates. Wednesday’s economic calendar includes some important data, such as fresh readings on retail sales, consumer prices and regional manufacturing data, that we are going to detail below. According to the Commerce Department’s figures, retail sales rose more than expectations in January, increasing 0.4%, above the 0.1% gain economists expected. At the same time, December’s retail sales figure was revised up to show a 1.0% increase. Core retail sales, which exclude auto and gasoline categories, climbed 0.7% in January, beating forecasts of a 0.4% uptick.
The Labor Department released a fresh report on its headine inflation gauge earlier this Wednesday. The U.S. consumer price index (CPI) jumped 0.6% in January and 2.5% year-over-year, according to the Labor Department’s data. The consensus expectation was for a 0.3% increase for January’s CPI. As far as core inflation is concerned, which strips out volatile food and energy categories, it rose 0.3% over the prior month and 2.3% on a year-over-year basis.
Manufacturing activity surged in the New York region in February, according to the Empire State general business conditions index released today. The index jumped to 18.7 in February from 6.5 last month, the highest reading in more than two years.
Besides these domestic economic reports, an important event is on the calendar today, as Fed Chairwoman Yellen will testify before the House Financial Services Committee. A more hawkish tone from Yellen, would certainly push mortgage rates higher.
Earlier this week some top Fed officials made public appearances and shared their views on the U.S. central bank’s interest rate policy. In remarks prepared for posting to the Dallas Fed website, Dallas Fed chief Robert Kaplan called for gradual interest rate increases. According to Kaplan, the U.S. central bank should increase rates sooner rather than later, in order to avoid rapid rate hikes.
However, not all Fed policymakers are convinced, that the U.S. central bank should act soon to tighten monetary policy. Atlanta Fed President Dennis Lockhart said on Tuesday, that the Fed doesn’t need to rush raising rates, as the organization evaluates how the Trump adminstration’s policies may impact the economy. Lockhart added, that „I don’t really see compelling reasons to move ahead in March.”
On the other hand, Richmond Fed President Jeffrey Lacker, who is considered one of the more hawkish central bankers, said in prepared remarks on Tuesday, that „rates need to rise more briskly than markets now seem to expect,”. Lacker believes, that the U.S. central bank may have to raise rates more rapidly than market expectations, given the uncertainty surrounding the Trump administration’s upcoming policies.
While most economists still believe that the Fed won’t raise rates until June, but investors and traders see a 26.6% chance of a rate increase in March, according to the CME Group’s FedWatch tool. The Fed fund futures show, that the odds for a rate hike at the June Fed meeting is now 46.1%.