Corona-Crisis Takes Mortgage Rates on a Roller-coaster Ride
Yes, the Fed lowered short-term rates to 0%. Yes, the Fed is embarking on a massive $700 billion bond-buying spree that's supposed to lower interest rates. Yes, mortgage rates actually went UP last week... in a big way. What gives?!
The Fed doesn't control mortgage rates. Mortgage rates are determined by the supply and demand for mortgage bonds in the bond market. When mortgage bond prices go up, mortgage rates go down. When mortgage bond prices go down, mortgage rates go up. Here's a chart illustrating the roller-coaster ride that mortgage bond prices have taken during the past two weeks... this had the impact of mortgage rates fluctuating by 0.5% - 1% from one day to the next:
The main reason for the volatility in bond prices is that investors are unsure how much supply will be hitting the market in the coming weeks and months. For example, if America, Europe, and Asia each create $1 trillion of economic stimulus to combat the economic fall-out from the coronavirus, governments will be issuing a whopping $3 trillion-plus in new bonds to fund the stimulus. This gigantic and unprecedented supply of new bond issuance won't be spread out evenly over time. It will hit the market like an avalanche in a matter of weeks due to the immediate nature of the stimulus. THAT is why bond investors are spooked. Central banks like the Fed can't possibly absorb all this new supply. Private investors will need to absorb lots of it.
That brings up another problem: China's central bank and other central banks normally invest their surplus of dollars back into the US bond market. Now that international trade is screeching to a halt, there's no more massive trade deficit. This means that central banks don't have a surplus of dollars to reinvest back into the US. Investors who normally would buy up massive amounts of US bonds simply have no surplus cash to do so in the current environment.
Expect the volatility in mortgage rates to continue for the foreseeable near future! Please contact me for more info or if you have any questions.
Please be aware: by refinancing your existing mortgage, your total finance charges may be higher over the life of the loan.