Mortgage Rates Shocked by OPEC Deal

Mortgage rates rose moderately today, bringing them roughly back in line with last week’s levels.  For the record, we are still in better shape than the high we saw last week, but we are still at the highest rates since the end of last year. The much-anticipated OPEC deal primarily drove today’s bond market weakness.  What is the OPEC deal and why is it impacting mortgage rates? 

The OPEC deal essentially serves as an agreement among OPEC countries to limit oil production.  The goal is to push oil prices higher.  Higher oil prices imply higher inflation, and inflation is an enemy to low interest rates.  With this logic, it would be easy to assume that rates would move higher any time oil prices moved higher, but that is not the case.  Today's OPEC deal did more damage by influencing long-term inflation fears.  After all, if OPEC countries are willing to come to agreements like this, bond markets (which drive mortgage rates) need to account for the threat of general upward pressure on prices (due to higher fuel costs), all other things being equal. 

That said the rise today in oil has driven any views of more declines in the bond and mortgage markets on the rocks. So far though, even with the shock from OPEC the bellwether 10yr note has not made a new high - it declined from 2.40% one week ago, to 2.29% yesterday. The high today was 2.41% but it ended at 2.39%.  However, MBSs got hit hard today. 

I am not saying rates will recover, I am just hoping that this so-called consolidation we have been talking about was only a two-day shelf life. As you know we are very bearish on interest rates, and I believe we made that very clear recently even though we tried the correction side. That looked good until OPEC this morning.

Rates have nowhere to go but higher - not to the sky but higher. Trump is going to print money faster than any Bernanke helicopter money, and this will be real paper dollars. His and market views that infrastructure spending will lead to increased money velocity next year and in 2018 as those massive spending plans kick in for real - bridges, airports, dams, railroads, and much more are coming. A lot of new jobs and pushing inflation a little higher.

For years, the Fed and other central banks have failed in attempts to get economic growth moving; central banks failed in their efforts. Now lower taxes promised and massive increase in the US deficit will force interest rates higher next year and into 2018. Bank deregulation will lead to more lending and less restrictions further adding to growth and increased debt for consumers and governments. Markets are buying into it now. Looks good now but look at Japan, it printed money that burnt out the presses yet 20 years later no growth - lots of bridges to nowhere yet no inflation and no economic growth. Demographics worked against Japan and eventually will work against the US.  How long all this will last, we have no idea. Overall you can sum it up as a revolution and revaluation of sentiment not experienced since back in the 90s.

In summary, the float boat is quickly sinking.  Economic data was not mortgage rate friendly and quickly sent rates testing the recent highs.  The momentum has certainly been against us and today is just another reminder.  Tomorrow and Friday bring more key economic data and certainly can push rates above our recent resistance level of 2.42% on the 10yr Treasury.  All new applications should lock for 45-60 days due to the volatility and the upcoming holiday lag.  For loans caught in the Trump-nado, today is a bad sign, it may be time to lock and move on, or as I am telling some of the gamblers out there - be patient to see if the support level holds into Friday's employment report.