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We hit record low mortgage rates a week ago on headlines about a possible second wave of the coronavirus. Rates had been trending higher this month after the amazingly strong May jobs report. That positive news was reinforced by private reports of increasing economic activity. The coronavirus news was a wet blanket that thrashed the stock market and caused flight to safety bond buying.
So, Treasury rates have returned to what I call their “covid range.” We saw little movement this week as investors seem to be waiting for more definitive information about the reopening of the economy. That’s been good news for mortgage rates because, as we’ve discussed before, mortgage rates have been suffering from a “risk premium” effect. That premium is slowly evaporating, and as it does, mortgage rates fall just a bit more.
If you haven’t refinanced yet or you’re thinking about buying a home, you may wonder if this means mortgage rates are destined to hit new record lows in the weeks ahead. Unfortunately, my crystal ball is clouded, so I can’t give you a definite answer. But we can discuss the factors that could lead to new record lows.
Simply put, it’s covid headlines. Last week’s stock market swoon was driven by fears that the covid damage wasn’t done. Headlines about spiking virus cases will stoke that fear. For now, the fear seems to be balanced against the recent positive economic data, leaving rates stuck in their current range. Should the data begin to deteriorate, or should the headlines become more dire, rates could fall further.
But keep in mind that every new record low is a little harder to achieve. For bonds, the rate is inversely proportional to the bond’s price. Thus, when we have record low rates, we have record high prices. Each time we hit a record high price, more bond investors are likely to view it as “the one,” sell their bonds and take their profits. If there are more sellers than buyers, rates rise.