Managing Market Uncertainty

Market Commentary by Mike Dugan, Vice President of Capital Markets at Willow Bend Mortgage

One of the top questions on most homeowners’ and future homeowners’ minds is: what is the mortgage rate forecast and where are rates likely to go in 2020?

And while we wish there was a hard and fast answer, it simply can’t be known with certainty. However, we can gather some clues by examining the yield of U.S. Treasury securities, the performance of the U.S. economy and the actions taken by way of the Federal Reserve’s Open Market Committee. 

The U.S. Treasury Yield

First, the 10-year U.S. Treasury yield, long-used as a proxy and potential forecast for mortgage rates, is seen as a sign of investor sentiment about the economy. The U.S. yield curve for government debt is normally upward sloping. As bonds mature further out into the future, the interest rate typically increases. With inversion, the relationship goes into reverse. When the yield curve is inverted, the debt holder earns less interest on a longer term bond than on a shorter term bond. In 2019, the yield curve first inverted in March, raising the prospects for a recession. History has proven that a recession is never too far behind an inversion. Recently, however, the yield curve inversion has started to reverse, as the 10-year Treasury note and the 30-year Treasury bond was yielding 1.768% and 2.254%, respectively. This is an encouraging trend!

Economic Growth

Second, despite concerns about a potential economic slowdown, recent data suggests the U.S. economy is doing well. Unemployment and retail sales numbers continue to reflect economic strength. For example, according to The Bureau of Labor Statistics, the U.S unemployment rate fell to a 50-year low in September, dropping to 3.5%. Moreover, retail sales grew more than expected in August, rising 0.4%, implying that the U.S. consumer is confident about the strength of the U.S. economy.Despite the fact that the United States – China trade war continues to drag on, the hard economic data suggests that the fears of a recession may be exaggerated.

Interest Rate Cuts & Mortgage Forecast

Finally, the drop in mortgage rates earlier this year sparked the largest refinance boom in three years. In July, the Federal Reserve cut interest rates by 25 bps (basis points) for the first time since the Great Recession. Then, in mid-September, the Fed cut interest rates again by another 25 bps. Despite the back-to-back rate cuts in July and September, refinance opportunities have declined as a result of the upward trend in interest rates.

Based upon recent activity in the future’s market, investors increased their expectations for a third-rate cut at the Fed’s Oct. 29-30 meeting. The Fed announced their decision to lower its benchmark funds rate by 25 basis points to a range of 1.5% to 1.75%. However, at this point, it’s too early to forecast if a fourth rate cut is in the cards during the Fed’s final meeting on December 10-11.

Next Steps

The best way to manage your uncertainty in the market is to stay informed. As always, here at Willow Bend Mortgage we are here to help you weather the storms and embrace the opportunities that present themselves to you. If you have any questions, please reach out to your local loan officer or find one in your area here.