The year began on a rough note for mortgage rates. A one-two combination of a fiscal cliff deal and unfavorable news from the Fed caused mortgage rates to end the week sharply higher. The economic data released last week generally came in close to expectations.
Wednesday, mortgage rates reacted to the news that politicians reached a fiscal cliff deal which will avoid most of the spending cuts and tax increases which were set to take place at the start of 2013. While much of the debate was simply postponed, the deal reduces the risk of slower economic growth which would have resulted from the expiring programs. This was good news for stocks and bad news for bonds.
The second big surprise last week came from Thursday’s release of the FOMC Minutes from the December 12 Fed meeting. Investors have believed that Fed officials intend to continue purchasing mortgage-backed securities (MBS) and Treasuries for quite a while. The Minutes revealed that there was far less support for Fed asset purchases than previously thought, however. With the Fed currently buying the majority of all newly issued MBS, the hint that Fed purchases could end sooner than expected caused MBS prices to decline. Since mortgage rates are largely determined by MBS prices, mortgage rates increased.
The economic calendar will be very light this week. Import Prices and the Trade Balance will be released on Friday. There will be Treasury auctions on Tuesday, Wednesday, and Thursday.
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