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Why Have Rates Moved Higher?

Chris and Marcie Hines with Cornerstone Home Lending explains that after reaching record lows near the end of July, mortgage rates have moved steadily higher this month (and MBS-mortgage backed securities have fallen). From their peak around July 24, MBS have dropped by more than two points, and mortgage rates have increased one quarter point or more.

Prior to July 26, two primary factors were responsible for the decline to record lows. First, the European debt troubles caused investors to shift to relatively safer assets, including US MBS. Second, slower economic growth reduced inflationary pressures and supported low mortgage rates. While the troubles in Europe and sluggish growth rates are likely to remain for quite a while, what changed is that investor expectations on both fronts have improved this month, which has been negative for mortgage rates.European Union

 On July 26, the President of the European Central Bank (ECB) declared that the ECB will do “whatever it takes” to preserve the European Union (EU). Since then, investors have raised their expectations for additional aid from the ECB. The Germans, who will bear much of the cost of the aid, appear to be more willing to reach an agreement, as long as it includes long-term reforms. While it’s still not certain that Greece will remain in the EU, investors feel that the larger countries such as Spain and Italy will receive enough aid to prevent their troubles from spreading. As a result, investors have partially reversed the flight to safety trade, lifting stocks and hurting MBS.

 The stronger than expected July Employment report released on August 3, yesterday’s Retail Sales report, and improving housing sector data have raised hopes that the US will lead the rest of the world back to at least average levels of economic growth. The outlook for economic growth remains uncomfortably low, but what impacts mortgage rates is the change in expectations. In typical fashion, as expectations have improved, rates have moved higher.

 Chris and Marcie Hines, Cornerstone Home Lending, http://www.hinesteamokc.com