Market Comment

Mortgage bond prices finished the week slightly lower which put a little upward pressure on rates. Rates took a negative tone to start the week, were neutral mid-week, and saw some additional upward pressure Friday. The U.S. Government data remained delayed due to the shutdown. Third party releases were few and far between. ADP employment rose 42K vs 25K. University of Michigan consumer sentiment was 50.3 vs 53.2. Stocks remained volatile with large daily swings but looked to close the week on a sharp negative note. Mortgage interest rates finished the week worse by approximately 1/8 of a discount point.


LOOKING AHEAD

Globalization

Economic globalization is the increasing interdependence of national economies through trade, finances, and technology. While economists debate the pros and cons of globalization, the fact remains that globalization is not new and continues to expand.

As a driving force in the global economy, the US often benefits when foreign economies struggle. Investors often move funds to safe havens in what is called a “flight to quality” in uncertain times. US debt instruments saw an influx of foreign investment historically amid concerns of nations defaulting on their debt and various banking institutions struggling. For example, investors moved into US debt instruments such as Treasuries and mortgage-backed securities amid economic sanctions on Russia after the invasion of Ukraine in 2022. Bond prices rose, which caused mortgage interest rates to fall. It was great for U.S. homebuyers and those refinancing if they took advantage of the decline in rates. However, what goes up often comes down. We have historically witnessed times when that pattern reverses.

Nobody can say with certainty where mortgage rates will be in the long-term. Fortunately, the Fed’s effort to hold mortgage bonds and keep rates in check has worked. Their goal is to get inflation back to the 2% target and as they do so mortgage rates will trend downward. However, in the short term there are no guarantees. Fed Chair Powell stated the Fed will continue to reduce its MBS holdings and will not use MBS purchases to directly lower mortgage rates. He also acknowledged past purchases may have contributed to housing market imbalances and directed the Fed to shift its balance sheet to be primarily Treasury securities. The Fed will stop overall balance sheet reduction in December 2025 but will continue shrinking MBS holdings by reinvesting payments into short-term Treasuries. Be cautious here amid continued uncertainty. Rates will likely head lower over time if inflation readings remain subdued. However, any hints of increased inflation will cause rate spikes.

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