The Federal Reserve has been discussing slowing down and eventually ceasing its bond purchases. This bond purchase program is, to some degree, what has been responsible for pushing interest rates down for a long time. When that bond buying party stops, interest rates will increase.
Rates are up?
The mere discussion by the Fed of ending this program has caused interest rates to rise, which are up about 0.375% to 0.5% over the last few weeks. These comments from Federal Reserve officials, as well as stronger than expected economic data, has caused investors to think that the Fed will begin to scale back its bond purchases sooner than previously expected.
What has happened?
As a result, mortgage rates have gone higher over the last few weeks. Due to the above, and a perception of improved global economic growth, investors have grown less willing to own bonds. Instead investors have been taking on risk by buying equities.
For years after the 2008 financial crisis investors accepted low yields in the bond market in a “flight to quality.” But that seems to be changing. Mortgage rates are heavily impacted by bond prices. So mortgage rates have moved higher lately as investors have swung back to investing in equities.
I am not convinced we are in a global economic recovery. But rates have been suppressed for so long, I do believe that rates will continue to increase. Stay tuned to see what happens, and why.