Mortgage Rates Move Up in Face of Robust Refi Demand

Somehow, some way, mortgage rates actually moved higher this week, touching their highest level in almost a month despite immense volatility in the markets and Treasury yields falling and remaining near all-time lows.

After bouncing along near record lows for a few days, mortgage interest rates shot up over the last two days. What’s most curious about the move over the last two days is that the jump hasn’t coincided with significant changes in Treasury yields, which were essentially flat on Tuesday and the early part of Wednesday even as mortgage rates jumped nearly 30 basis points. So, what’s the deal? Demand for refinancing spiked as initial reports spread of record-low rates, and a mass selloff of bonds appears to be driven by fears of this surge in refinancing. In short, more refinancing reduces the value of mortgage-backed securities: Holders receive an earlier repayment than planned, and then must reinvest that money elsewhere, presumably at a lower yield than that offered by the previous loan. Some are speculating that lenders may be artificially buoying advertised rates in order to stem this rising tide of refinancing activity and simply keep up with demand.

All else equal, if refinancing activity begins to slow, then rates will almost certainly trend back down. But of course, all else is not equal, and markets are now in the midst of their most tumultuous stretch since the financial crisis. More dramatic moves for mortgage rates appear likely, as investors continue to try and best position themselves to deal with the challenges posed by this environment.