WHAT'S HAPPENING WITH MORTGAGE RATES?

The following are key factors that could impact mortgage rates this week, with a focus on the bond market:

• Bond Market Dynamics: The bond market has experienced a significant drop in yields and interest rates over the past month, driven by expectations that the Federal Reserve (Fed) may start cutting interest rates as early as March. This sentiment has been strong, with a 70% likelihood of a rate cut in March, according to the interest rate futures market.
• Consumer Inflation Numbers: Despite an uptick in consumer inflation numbers last week, the bond market's confidence in a rate cut has remained largely intact. The bond market appears to be discounting the inflationary pressures, and this could impact the market sentiment.
• Record Government Bond Supply: One of the major factors influencing the bond market is the record amount of government bond supply expected to hit the market this year. This surge is attributed to growing government deficits and higher interest rates, which require more debt issuance. Bond investors are becoming nervous about the increased supply, especially if the Fed is not actively buying bonds but rather selling them.
• Fed's Role: The market is grappling with the question of who will absorb the substantial amount of government bonds when the Fed, which has been selling bonds, is seemingly out of the picture. The Fed's actions and statements will be closely watched to gauge its stance on interest rates and bond purchases.
• Volatility in Interest Rates: The interplay between the bond market's anticipation of future rate cuts and the reality of surging government deficits and bond supply is likely to result in heightened volatility in interest rates. The market may experience fluctuations as it grapples with these conflicting factors throughout the week.
• Market Reaction to Government Debt Issuance: The bond market may receive a reality check as it confronts the practical implications of increased government debt issuance. Investors' responses to the bond auctions and the overall market demand for government bonds will be closely monitored.
• Overall Economic Outlook: The bond market's reaction to economic indicators, financial reports, or any significant developments that could impact the broader economic outlook may also influence mortgage rates.

In summary, the week ahead is expected to bring a mix of anticipation for rate cuts and concerns about the growing supply of government bonds. Investors and market participants should be prepared for potential volatility in interest rates as the bond market reacts to these competing factors.

The figure of $7.6 trillion represents the amount of government bonds scheduled to mature this year and subsequently be refinanced at the current higher interest rates. This substantial sum underscores the magnitude of debt rollovers and the potential impact on the bond market. As these bonds come due, the government will need to issue new debt at prevailing interest rates, which could further contribute to the dynamics influencing bond yields and overall market conditions. The sheer scale of this refinancing activity adds to the overall narrative of increased government borrowing and its implications for the broader financial landscape. Investors and analysts will closely monitor how the market absorbs this significant amount of debt and its subsequent effects on interest rates and bond prices.

Wishing you a fantastic week ahead!

Tina Lucarelli - Global Real Estate Advisor, Westlake Village, CA 91361