Mortgage Applications Rise as Treasury Yields Fall

Despite efforts from the Federal Reserve to drive interest rates higher, lower expected borrowing costs and sliding inflation are lowering Treasury yields and may make mortgages cheaper.  Mortgage applications rose as interest rates fell, according to a new report by the Mortgage Bankers Association (MBA), which noted a 6.2% increase in total mortgage applications from the prior week.

Despite efforts from the Federal Reserve to drive interest rates higher, lower expected borrowing costs and sliding inflation are lowering Treasury yields and may make mortgages cheaper.  Mortgage applications rose as interest rates fell, according to a new report by the Mortgage Bankers Association (MBA), which noted a 6.2% increase in total mortgage applications from the prior week.

According to the MBA, an increase in home purchase activity, which rose 12% from the prior week, drove total application volume. Refinancing activity also increased, a surprising break from a long-standing trend increasing interest rates and expectations of higher rates to follow driving lower refinancing activity.

These expectations were bolstered in December when the Federal Reserve (the Fed) raised its Fed Funds rate target slightly, in-line with previous guidance that the Fed would try to make borrowing money more expensive by the end of the year. After the Fed Funds rate rose, many large American banks announced an increase to their base rate and interest rates on several financing products, including mortgages.

That drove interest rates upwards, and mortgage loans saw an increase last week to 4.18% from 4.12% the prior week for 30-year fixed rate mortgages. However, many analysts believe the Fed Funds rate is likely to face pressure in the near term as investors bet against the Fed and foresee lower rates due to weak growth and inflation.

Treasury Yields

With the Fed’s policy decision causing higher interest rates for short-term bonds, market participants expected interest rates on long-term U.S. Treasuries to also increase, but rates have begun a steep fall. Yields on the 10-year U.S. Treasury fell below 2% in yesterday’s trading for the first time in nearly a year, a surprising move that also put the yield curve in jeopardy.

According to many economists, if the yield on short-term Treasuries rises to exceed the yield on long-term bonds—the so-called “inverted yield curve”—this could indicate a lack of liquidity in credit markets and precipitate a recession.

Fears of recessionary conditions have grown in recent weeks and caused stocks to fall lower. Some analysts point to weak energy costs dragging key industries, such as fracking and oil production in Texas, which is also facing falling rents, wages, and overall economic activity. Others still point to income inequality, weak access to credit, and stagnant wages as causes of a weak economy that cannot bear higher borrowing costs if the Fed raises interest rates.

Historically, an inverted yield curve has precipitated most recessions in American history, which has caused some economists to warn the Federal Reserve that its Open Market Committee needs to raise rates slowly, or not raise rates at all, until they see more robust labor market strength. While headline unemployment has fallen to 5%, indicating nearly full employment, other indicators of labor strength, such as year-over-year hourly wage growth, job turnover, job openings, consumer sentiment, and the labor participation rate, have shown signs of persistent weakness.

This has led some economists to argue that a new method of measuring the labor market is needed, and that the Fed is currently depending on imperfect and inaccurate measurements of an economy that is significantly weaker than the agency thinks.