Mortgage Rates Fall as Treasury Yields Stay Low

In another sign of slow growth and weak demand, mortgage rates fell to their lowest point this year as Treasury yields fell to almost their lowest rate in history.  U.S. Treasuries fell to less than 1.7% during Thursday trading, nearing the all-time low achieved earlier this year of 1.64%.

In another sign of slow growth and weak demand, mortgage rates fell to their lowest point this year as Treasury yields fell to almost their lowest rate in history.  U.S. Treasuries fell to less than 1.7% during Thursday trading, nearing the all-time low achieved earlier this year of 1.64%.

Treasury yields have fallen significantly since Yellen’s promise to raise rates three times in 2016, which has since been modified to two times in light of soft economic data pointing to low wage growth, low high paying jobs growth, and systemic weakness in aggregate demand for goods in services both in the U.S. and abroad.

The weakness of American growth has been cited as the primary concern for the Federal Reserve, after St. Louis Fed President James Bullard said in a Bloomberg interview that economic growth has eclipsed soft labor conditions as his primary economic concern. “Tracking forecasts have been marked down. There hasn’t been all that much data since the March meeting,” Bullard said in the interview, adding that a weak first quarter in 2016 remains a “puzzle” of constantly disappointing data.

“The inflation numbers themselves have been stronger,” Bullard said, but also said that market expectations of inflation remain too low and that a “violent” reconciliation between market expectations and the Federal Reserve’s view has become a worry for the Fed.

Weak Inflation Hopes Boost Home Buying

Paradoxically, the pessimistic worldview of the markets is increasingly benefitting homebuyers. In the latest Freddie Mac survey, mortgage rates were seen to fall to their lowest rate in a year, with 30-year fixed-rate mortgages declining to 3.59%, a substantial drop from the prior week’s 3.71%.

Nonetheless, the spread between mortgages and long-term U.S. Treasury rates has increased significantly from 2011 to 2013, leading some analysts to predict even cheaper mortgages may be forthcoming in the short-term.

The fall in mortgage rates is largely a result of weak U.S. Treasury rates, which incentivizes competitive bidding for lower interest rates from banks looking to sell mortgages to Americans. This, in turn, has made home buying more affordable for Americans, although few data points indicate an improvement in home buying activity. One survey by Credit Suisse showed a sequential increase of home buying in March, with 14 of 40 markets seeing higher than expected traffic.

Home purchases, however, may be hindered by rising prices. A recent CoreLogic study saw a 6.8% year-over-year increase in home prices that mostly offsets the discount in monthly payments caused by lower interest rates. Economists continue to caution that protracted above-inflation price gains in the real estate market will make properties unaffordable for most Americans, especially if the Federal Reserve succeeds in raising interest rates and causing mortgage rates to tick upward.