By: Gustian Farrow, Head of StoneX TV • Content Channels
Matthew Johannes, StoneX Head of Agency MBS Trading, discusses the recent decline in US mortgage rates and the forces behind it.
Johannes explained that mortgage rates are closely linked to the ten year Treasury yield, which has fallen by around 20 basis points in recent weeks. He highlighted that weak nonfarm payroll data, showing only 22,000 jobs added in August and unemployment rising to 4.3 percent, signaled a cooling labor market and created space for the Fed to cut rates. “That probably clears the path for rate cuts in September and maybe potentially another rate cut sometime this year” [01:39].
While the Federal Reserve does not directly set mortgage rates, its monetary policy tools play a key role. Johannes pointed to both the fed funds rate and balance sheet activity. Lower short term rates attract leveraged investors like REITs and banks into mortgage backed securities, compressing spreads and driving mortgage rates lower. “That ultimately brings mortgage rates lower in the US” [03:02].
Despite the drop, affordability remains a challenge. Johannes noted that the decline from 6.9 percent to 6.67 percent in average rates saves roughly $100 per month on a $500,000 mortgage. He stressed that only a move to sub 6 percent rates would significantly boost housing demand. “That will really kind of start to increase the demand for housing in the US” [04:04].
Lower rates may also trigger refinancing. Johannes observed that many buyers had expected to refinance later, and that moment may be arriving. Rising refinance activity could negatively affect higher coupon mortgages but simultaneously force investors to buy more duration, amplifying the rally. “It’s a self-fulfilling prophecy in some ways to where as we start to rally, you can really rally hard” [06:04].
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---- Written by Gus Farrow, Head of StoneX TV
---- Expert: Matthew Johannes, StoneX Head of Agency MBS Trading
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