Interest rates went up this week, about 0.25% to 0.375%, depending on the type of loan. Below are some details from a bond market service I use (called MBSQuoteLine) that sends me news on the bond market, which is the biggest driver of the direction of interest rates, on why this rate increase happened.
Mortgage Rates Move Higher
The year began on a rough note for mortgage rates. A one-two combination of a fiscal cliff deal and unfavorable news from the Fed caused mortgage rates to end the week sharply higher. The economic data released this week generally came in close to expectations.
Wednesday, mortgage rates reacted to the news that politicians reached a fiscal cliff deal which will avoid most of the spending cuts and tax increases which were set to take place at the start of 2013. While much of the debate was simply postponed, the deal reduces the risk of slower economic growth which would have resulted from the expiring programs. This was good news for stocks and bad news for bonds.
The second big surprise this week came from Thursday’s release of the FOMC Minutes from the December 12 Fed meeting. Investors have believed that Fed officials intend to continue purchasing mortgage-backed securities (MBS) and Treasuries for quite a while. The Minutes revealed that there was far less support for Fed asset purchases than previously thought, however. With the Fed currently buying the majority of all newly issued MBS, the hint that Fed purchases could end sooner than expected caused MBS prices to decline. Since mortgage rates are largely determined by MBS prices, mortgage rates increased.”
The fiscal cliff deal caused rates to move higher, because it was seen as stabilizing, and was seen as positive for the economy. In general, good news for the economy is bad news for rates, and may cause rates to go up. Bad news for the economy is good news for rates, and may cause rates to drop.
The Fed news that the Federal Reserve may not be as thrilled about buying Mortgage Backed Securities (which helps to suppress or lower rates) indefinitely, was also bad news for interest rates.
So there you have it, now you know why rates jumped. We’ll see what happens in the upcoming weeks.