Mortgage rates had another winning day today on the eve of the big Federal Reserve rate decision.
This one was kind of unexpected since there was no major news and the 10-year Treasury actually went up.
Normally, you’d expect mortgage rates to be flat or possibly tick up a little bit.
Instead, they rallied even more heading into a very important day tomorrow.
The big question is will it just create disappointment, or will rates move even lower on Fed day?
Mortgage Rates Are Just an Eighth Above Their Three-Year Lows
It’s been a good little spell for 30-year fixed mortgage rates, which have fallen nearly a full percentage point since May to 6.13%.
That’s the lowest reading (per Mortgage News Daily) since rates hit 6.11% briefly in mid-September 2024.
And it’s the lowest rates have been since February 2023 other than that period a year ago (basically three years since rates were even higher in the fall of 2022).
What’s more, about half of that movement took place in just the past month as the labor market finally showed signs of cracking.
It’s not necessarily great news for our economy, but existing homeowners in need of a rate and term refinance and prospective home buyers might like it.
Remember, bad economic news leads to lower mortgage rates, and it’s been pretty bad lately.
Two really ugly jobs reports in a row along with massive downward revisions in job additions were the culprit.
But nothing really happened today in the economy, other than a hotter-than-expected retail sales report that would otherwise maybe lead to higher rates.
Despite that, mortgage rates dropped another eighth (.125%) of a percent today to essentially match their best levels of the past 52 weeks.
Ironically, they were at these levels exactly a year ago too, before a hot jobs report (and subsequent election) sent mortgage rates flying.
Whether something similar happens this year remains to be seen, but we’ve got a Fed rate cut coming tomorrow to kick things off.
Along with it will be the quarterly dot plot, which details each Fed participant’s forecast for the federal funds rate for the next several years.
That provides a little more weight to the Fed statement and press conference with Jerome Powell afterwards.
Mortgage Rates Got an Unexpected Push Lower Today
As for why rates came down even more today, when economic data and bond yields didn’t necessarily support it, look no further than MBS buckets.
Matt Graham over at Mortgage News Daily chalked it up to the “esoteric” nature of mortgage-backed securities (MBS), which fall into buckets such as 5.5 or 5.0 (they are offered in half-point increments).
Each bucket can contain home loans with rates ranging from 0.25% to 1.125% higher than the coupon.
For example, a 5.5 coupon can accommodate a mortgage with a rate as high as 6.625%.
But as mortgage rates trend lower, investors may favor lower coupons for their perceived reduced prepayment risk.
After all, if there are a greater number of lower-rate mortgages in that bucket, they’re more valuable if rates fall further and everyone goes out and refinances their mortgage.
The lower coupon bucket will be less susceptible to mortgage prepayment because those homeowners will have lower rates already and less incentive to refinance.
Basically, investors will be more interested in buying the MBS with the lower coupon if that’s the case.
So today was apparently one of those days where there was a big shift in buying 5.0 UMBS instead of 5.5 UMBS, thanks to the current trend of lower and lower mortgage rates.
Does the Big Move Lower Today Set Up Disappointment Tomorrow?
The big question now is what will the Fed rate decision do, if anything? I argued in an earlier post that given all the downward movement of late, we could see a little bounce higher.
And that was before mortgage rates moved even lower today. So you kind of wonder if it’s all setting up for disappointment.
Especially from those folks who believe that the Fed sets mortgage rates.
Of course, that remains to be seen and a reversal might not transpire (rates could actually go down with a Fed rate cut!).
But it won’t have anything to do with the very much baked in 25-basis point rate cut that will happen tomorrow.
Where mortgage rates go afterwards could be driven by the dot plot and/or what Jerome Powell has to say in the presser.
Even if they do see a little retracement because of the big wins registered lately, it could be a temporary shift before mortgage rates continue on their merry way toward the 5% range.
But that will all depend on the economic data…
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 19 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on X for hot takes.