Fixed mortgage rates continue to set new historical lows, and have been dropping almost weekly since late spring. But has the downward mortgage rate spiral come to an end?

Fixed mortgage rates are heavily influenced by bond yields.

Bond yields are influenced by the economy.

Therefore, mortgage rates can be directly tied to economic performance.

With COVID numbers rising daily, it’s enough to make us wonder how long it will take before we see any sign of normalcy within our economy. With all the negativity out there, any positive news would be well received, and would help to improve consumer confidence. This can positively impact the economy, which can affect the performance of the bond yields, therefore influencing mortgage rates.

This week’s announcement of a vaccine on the way from Pfizer definitely qualifies as positive news!

It was well received by the financial markets, resulting in bond yields spiking up approximately 21% on Monday. The last time the yields were this high was back in early June of this year. At the time, 5 year fixed rates ranged from 1.99% – 2.29%.

So if mortgage rates are influenced by bond yields, and if they were at 1.99% – 2.29% the last time the yields were this high, then does that mean that we’re going to see mortgage rates head back up to this level?

The answer is no, and here’s why.

Fixed mortgage rates were artificially high at that time due to heavy economic uncertainty created by the pandemic. Mortgage lenders were still coming down from panic mode, which is what sent fixed mortgage rates soaring upward in mid–march. They simply panicked. Pretty much everyone was panicking then as they had no idea what to expect. Remember the toilet paper situation? I digress. If we were to adjust the rates to where they should have been at the time based on the yields, it puts them just slightly higher than where they are today.

If the yields continue to increase, or even remain at these levels, then it’s possible that we could see small increases to fixed mortgage rates. I think it’s more likely that mortgage lenders will ride out the spike and hold on to the lower rates to finish off the year. I also think that this spike in bond yields is transitory, and that we’ll see them settle back down. The spike was due to the market’s reaction to the vaccine, and market reactions don’t always last. We’re far from being out of the economic woods yet. COVID numbers continue to spike across the country, and another potential lockdown is not off the table. There is far too much uncertainty for us to think that mortgage rates will start trending back upward anytime soon. Even if some mortgage lenders were to make small upward adjustments to their rates, it’s likely that they will be reversed, and that mortgage rates will fall even further. While anything can happen, this is the more likely scenario.

In a healthy market. A 21% increase in bond yields would result in sharp and immediate upward increases to fixed mortgage rates across the board. Healthy is not the word I would use to describe today’s market however. It’s anything but. As I write this, not one lender has announced an increase to their rates….two days after the spike. If the yields were to continue trending upward, then we would definitely start to see mortgage rates follow suit. While this remains a possibility, I think there is a greater chance that fixed mortgage rates will fall further. Time will tell of course.