MMG Weekly | June 3, 2024

A Look Into the Markets

This past week interest rates moved sharply higher in response to a host of unfriendly bond news. Let’s discuss what happened and what to watch for in the weeks ahead.

We Need More Revenue

This past week was shortened due to the Memorial Day holiday, but it was filled with tall problems which caused rates to spike. It all started on the Friday before Memorial Day when Treasury Secretary Janet Yellen told the world that the path for rates is higher, and we need more revenue.

This was an important statement as it highlights our deficit spending and our need to sell more treasury debt to fund our government.

The debt sales were tested this past week and ended up being a main driver for the spike higher in interest rates. The Treasury sold $183B worth of 2,5 and 7-yr Notes and the auction results were poor where buyers demanded higher interest rates to purchase all the debt. As Treasury yields move higher, mortgage-backed security prices drop, thereby elevating home loan rates.

Higher For Longer

Since the Fed Meeting back on May 1st, where the Fed Chair Powell said they are not hiking or cutting rates, many officials have since been pouring cold water on the idea that a rate cut is coming soon.

This past week, we heard comments like “Don’t count out a rate hike” as the next move and “higher indefinitely” was uttered by another Fed official. This means those betting on a rate cut soon might want to reassess their position as the chance for the first cut has now been pushed back to November. And as we have seen over the last year or so, if inflation remains stubbornly high, we may not see a cut at all in 2024.

Higher Oil

Yet another problem for interest rates and the overall economy is energy prices. Oil hit $80 a barrel last week. This is significant as oil and 30-year mortgage rates tend to ebb and flow together. When oil prices edge higher so do mortgage rates. Why? 

High oil prices are inflationary. If inflation readings remain near current levels or even edge higher, there is no way the Fed can cut interest rates which means higher for longer.

Consumer Sentiment Moves Higher

Bonds hate inflation, bonds hate more bonds and bonds hate good news. Despite the uncertainty about higher interest rates and elevated oil prices, the consumer sentiment reading last week was an upside surprise as people felt a bit more optimistic – breaking a trend of recent pessimism.

Bottom Line: We should take the Fed at its word that rates will be higher for longer. Deficit spending and high energy prices will help fuel this notion. 

Looking Ahead: Next week is jobs week. The Fed has a dual mandate of promoting maximum employment and price stability. The Fed’s higher for longer narrative is based on inflation remaining high, but only if the labor market shows further weakness. The bad news could reignite talks for rate cuts sooner. The Jobs Report is supposed to show 151,000 jobs created.

Mortgage Market Guide Candlestick Chart

Mortgage bond prices determine home loan rates. The chart below is a one-year view of the Fannie Mae 30-year 6.0% coupon, where currently closed loans are being packaged. As prices move higher, rates decline, and vice versa.

If you look at the right side of the chart, you can see how prices have backed away from the best levels in a month.

Chart: Fannie Mae Mortgage Bond (Friday May 31, 2024)


Economic Calendar for the Week of June 3 – 7

John Higgins

NMLS #136061

The material contained in this newsletter has been prepared by an independent third-party provider. The content is provided for use by real estate, financial services and other professionals only and is not intended for consumer distribution. The material provided is for informational and educational purposes only and should not be construed as investment and/or mortgage advice. Although the material is deemed to be accurate and reliable, there is no guarantee it is without errors.

As your mortgage professional, I am sending you the MMG WEEKLY because I am committed to keeping you updated on the economic events that impact interest rates and how they may affect you.


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