Mortgage rates now at their highest level in more than two decades continued to climb this week as investors adjusted their expectations about the strength and resilience of the US economy. The most recent GDP estimates show an uptick in economic growth from the previous quarter and new data on business investment confirms equipment spending rebounded in August.

The yield on a 10-year US treasury – and mortgage rates that tend to follow – depends 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, rising oil prices, student loan repayments and the risk of a prolonged government shutdown are all expected to cool the labor market further and temper economic activity in the coming months. 

A stronger dollar as a result of higher interest rates is also expected to slow the pace of economic growth. A large slowdown in economic activity would be a drag on longer term yields and mortgage rates.