Economy’s Strength, Future Deficit Prospects Drive Mortgage Rates To Highest Level in a Year

For the second week in a row, the average prime 30-year fixed mortgage rate quoted on Zillow increased about 10 basis points over the past week, rising to 4.06 percent – its highest level since March 2017. There have only been seven days in the past 13 months when mortgage rates were higher.

Mortgage rates have increased by almost 30 basis points over the past month. Markets are increasingly cognizant that the underlying strength of the U.S. economy – a steady flow of incoming economic data point to a tight labor market, strong consumer spending, firming wages and rising domestic demand – will sooner or later translate into higher interest rates. At the same time, economic news abroad has also turned positive, with the European and Japanese economies posting their strongest performances in at least a decade (longer, Japan’s case).

The prospect of rising fiscal deficits are also pushing up rates. The Treasury Department issued upwardly revised guidance this week on its outlook for debt issuance in early 2018, providing markets with more detailed information about baseline expected demand for long-term funding. As expected, the Federal Open Market Committee left interest rates unchanged this afternoon – the final statement of Fed Chair Janet Yellen’s term – but the wording choice around the outlook for rates shifted slightly more hawkish.

On Friday, markets will watch the January Jobs Report – likely to be strong, though adverse weather in the northeast just prior to the survey week may make it hard to read too much signal into this particular report. In addition, John Williams of the San Francisco Fed – an important voter this year on the FOMC – will speak about the U.S. economic outlook, although his comments will be after the close of markets on Friday.