Mortgage Rates Much Lower After Debt Deal

Mortgage rates fell significantly today, returning in line with the lowest levels seen in recent weeks for some lenders.  Not every lender experienced the improvement in the same way, however, with some still not back to last week’s best offerings.  Whatever the case, the average top-tier Conforming 30yr fixed rate is back to 4.25% (best-execution).  Interestingly enough rates the most comparable day for rate sheets is just before the start of the government shutdown.

Despite our analysis suggesting rates didn’t care about fiscal drama as much as they cared about economic data, and despite rates making it right back to pre-shutdown levels, the past week had seen them move higher than they otherwise might if they truly didn’t care about the fiscal drama.  And now they’ve moved significantly lower due to the fiscal drama subsiding, one might wonder what gives.

Rates actually did quite a fine job of holding steady during the first part of the shutdown, and the sense that markets were more concerned with economic data and Fed policy was reinforced.  Indeed, the shutdown itself was of little concern for rates.  The approach of the debt ceiling, however, had a domino effect that ended up doing some damage.

To understand the damage, we need to understand something that rarely comes into play in a discussion of mortgage rates but is always operating silently behind the scenes: the short term funding market.  This simply refers to the shortest term borrowing and lending that takes place in massive quantities each day in financial markets.  These are the transactions that have shorter time windows than the 2yr Treasury notes, and range all the way down to “overnight” maturities.