Fixed Mortgage Rate Forecast – January 2013

Fixed mortgage rates are based on 5 year bond yields and as of late bond yields have been spiking.  The main reason for the latest spike is the fact that the US avoided falling off its fiscal cliff.  Prior to the Jan 1 deadline traders were shifting funds to the safe haven of bonds in order to avoid riskier investments.  Now that the immediate economic disaster has been avoided these same traders are dumping bonds in favor of higher yielding assets.  Traders dumping bonds mean bond prices go down and when bond prices go down, their effective yields go up.

The impact of this is that we suddenly have strong upward pressure on 5 year fixed mortgage rates.  The bad news is that the 5 year fixed mortgage rate is likely to increase by about 25 bps over the next few days and weeks.  The good news is that the overall mortgage rate environment still favors lower bond and mortgage rates for the medium term.  In other words a 0.25%s increase in mortgage rates is likely as high as they will go over the next few months with the possibility that they will come right back down to today’s levels within a week or two.

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