Stock Rally Hurts Mortgage Rates

A shift in preferences toward stocks and away from bonds was negative for mortgage rates over the past week. The economic data had little influence. Mortgage rates ended the week a little higher.

With long-term bond yields at or near record low levels following the Brexit vote on June 23, investors decided this week that stocks had become relatively more attractive than bonds. Investors shifted assets from bonds to stocks, pushing the Dow and the S&P to record highs, and sending mortgage-backed securities (MBS) prices lower. Since mortgage rates are set based on MBS prices, rates moved higher. Mortgage rates still remain significantly lower than they were before the Brexit vote.

Retail sales posted a fourth straight month of solid gains on Friday. Retail sales excluding the volatile auto component surpassed expectations with a large increase in June. Consumer spending accounts for about two-thirds of economic output in the U.S., and the retail sales data is a highly valued indicator. The recent increase in consumer spending has contributed to investor expectations for second-quarter Gross Domestic Product (GDP) growth to be around 2.5%, up from 1.1% in the first quarter.

Over the past week, a large number of Fed officials made speeches. Despite the pickup in the economy during the second quarter, Fed officials said that they expect to raise the federal funds rate at a very gradual pace. In futures markets, investors have priced in less than a 50% chance of a rate hike during the remainder of 2016.

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