Rates Started Lower, But Rose Unexpectedly This Afternoon

First thing's first: we deal in extremely granular terms when it comes to mortgage rate movement here.  If you're just looking for an idea of how today's rates are versus yesterday's, they're lower.  The headline is a reference to intraday reprices--the practice of changing rates for better or worse during the business day in response to changes in market conditions. 

Reprices are common.  We rarely see a day without at least a few of them.  Today didn't set any records in that regard, but the average lender ended the day with slightly higher rates versus the morning's initial offerings. 

The afternoon reprices were counterintuitive considering the day's big event: the release of July's Consumer Price Index (CPI) at 8:30am ET.  As far as scheduled reports are concerned, few have had more market moving potential than CPI over the last few months.   That's because CPI is the more timely of the 2 main inflation indices in the US and inflation has been a big deal for rates in 2022.  

The upward pressure on rates was counterintuitive because CPI showed inflation coming in distinctly lower than expected and much lower than last month both for the overall index and the "core" (which excludes more volatile food and energy prices).  Notably, the headline increase for July was 0.0% versus +1.3% in June!

If you were a bond trader or rate watcher who had to bet on how bonds/rates would react to such a report, you'd need a really good reason to bet on anything other than rates moving lower.  Indeed, that's exactly what happened in the immediate wake of the data this morning.  Treasury yields dropped and mortgage-backed bonds surged (that's a good thing for mortgage rates).

But as the morning progressed, bonds began moving in the other direction.  Longer-term Treasuries actually ended up at higher yields by the end of the day.  MBS (the mortgage-backed securities that dictate mortgage rates) held on to a decent amount of improvement, but lost more than half of the gains from the morning. 

Mortgage lenders increasingly repriced for the worse as bonds lost ground, but even after those reprices, rates were still in better shape than yesterday.  The average lender is still in the low 5% range for flawless 30yr fixed scenarios.  Rate quotes range from the mid 4's to the mid 5's depending on several variables.  This is a much wider spread than normal, but not quite as wide as it seems by the time you account for different quoting strategies (with upfront "points" being the biggest distinguishing factor). 

So why did rates make the counterintuitive move?  A detailed, responsible answer would be complex and unavoidably wordy.  The short version (and please note: this is a gross oversimplification) is that the market was already generally in agreement that inflation had topped out over the past few months.  The next order of business was to react to strength or weakness in the economy.  Lower inflation allows for more economic resilience and it's economic resilience that will do more than anything to prevent rates from falling very quickly.  Lower inflation also decreases the Fed's urgency to hike rates and while that sounds like a good thing, it has been the austerity associated with those rate hikes that caused many investors to ramp up bets on economic weakness.