“Mortgage rates continued to climb this week, surpassing a 22-year high, as investors continue to adjust their expectations about the strength and resilience of the US economy,” said Orphe Divounguy, senior macroeconomist at Zillow Home Loans. “While activity in the service sector is still moderating, new data shows manufacturing sector activity has already bottomed. Despite cooling in recent months, the labor market also remains tight, suggesting that without sustained increases in labor productivity, upside inflation risk remains. Rising fiscal deficits are also expansionary, and expected to push bond yields higher.
“Recent speeches by a couple of Federal Reserve officials suggest shorter term rates will likely remain high for longer than previously anticipated. Longer term yields – such as the yield on the 10-year US treasury, which mortgage rates tend to follow – depend on expected economic growth as well as investors’ future inflation expectations. Inflation expectations have remained stable of late, slightly above the Fed’s target. Stronger than anticipated economic activity is pushing real yields and nominal yields higher.
“However, the impacts of tighter credit conditions and a persistent rise in oil prices are expected to cool the labor market further and temper economic activity in the coming months. This week’s US employment and wage growth data release will likely cause large swings in mortgage rates.”