Rates reverse course as the debt limit deal advances and Fed officials signal a pause in rate hikes
Mortgage rates jumped last week amid a debt ceiling impasse and expectations of another federal funds rate hike. However, rates have started to reverse course over the last few days, following news of a debt agreement and signals that the Federal Reserve may pause hikes.
On the fiscal side, President Joe Biden and House Speaker Kevin McCarthy struck a deal on Saturday to suspend the $31.4 trillion U.S. debt limit until January 2025 and cap government spending. On Wednesday, the deal passed in the House with a wide margin (314-117) and the support of both parties. The Senate is expected to vote on the bill by Friday, just a few days prior to Monday’s default deadline.
Meanwhile, on the monetary front, there is a growing perception that the Fed may skip a federal funds rate hike in its meeting scheduled for June 13-14, despite a still-strong economy and persistent inflation. Officials want to assess more economic and bank lending data and may hike rates later this summer, as the Wall Street Journal reported. Fed officials are especially focused on Friday’s jobs report and signs that the labor market has finally cooled down.
In the housing market, Freddie Mac‘s Primary Mortgage Market Survey, which focuses on conventional and conforming loans with a 20% down payment, shows the weekly rate increase. The 30-year fixed-rate mortgage averaged 6.79% as of June 1, up 22 basis points from last week’s 6.57%. The same rate averaged 5.09% a year ago at this time.
Sam Khater, Freddie Mac’s chief economist, said the increase in rates measured by the survey happened “as a buoyant economy has prompted the market to price in the likelihood of another Fed rate hike.”
“Although there has been a steady flow of purchase demand around rates in the low to mid 6% range, that demand is likely to weaken as rates approach 7%,” Khater said in a statement.
Other indexes show mortgage rates’ downward trend in the last few days amid lower fiscal and monetary pressures.
The 30-year fixed rate for conventional loans, which hit 7.14% at Mortgage News Daily Friday last week, was down to 6.88% on Wednesday. HousingWire’s Mortgage Rates Center showed Optimal Blue’s 30-year fixed rate for conventional loans at 6.72% on Wednesday, down from 6.85% Friday last week.
The weeks ahead
Mortgage rates usually follow the 10-year Treasury yield, which retreated from 3.81% on Monday to 3.60% on Thursday morning as a resolution to the debt ceiling impasse seemed to materialize, according to George Ratiu, the chief economist at Keeping Current Matters.
“The spread between the 10-year Treasury and the Freddie Mac 30-year mortgage rate remains close to 300 basis points, a range typically seen during times of significant economic volatility,” Ratiu said in a statement.
“While mortgage bond investors remain concerned about the downside risks for both the economy and housing markets, a successful debt ceiling bill is expected to bring mortgage rates lower in the weeks ahead,” Ratiu said.
However, according to Jiayi Xu, a Realtor.com economist, the successful passage of the debt ceiling deal does not provide an absolute safeguard against negative financial and economic consequences.
“Once the deal is reached, the U.S. government is expected to quickly increase issuance of Treasury bills, which has the potential to cause short-term liquidity challenges at banks, as businesses and households may reallocate their funds towards higher-yielding and relatively safer government debt,” Xu said.
“In order to keep attracting depositors, banks might be compelled to raise interest rates, thereby squeezing profit margins. This could lead to further rate increases across various loan products offered by banks, including both business loans and personal loans.”