Expectations of Interest Rate Cuts... US Mortgage Rates Fall to 6% Range for the First Time in Three Months

30-Year Fixed Mortgage Rate at 6.94%
Impact of US Treasury Yield Decline Amid Inflation Slowdown

Mortgage rates in the United States have fallen below 7% for the first time in three months. This is a result of declining U.S. Treasury yields following easing inflation indicators, which has fueled expectations that the Federal Reserve (Fed) will cut interest rates later this year.

According to the Mortgage Bankers Association (MBA) on the 19th (local time), the 30-year fixed mortgage rate dropped 8 basis points (1bp=0.01 percentage point) from the previous week to 6.94%. This is the first time since March that the 30-year fixed mortgage rate has fallen into the 6% range.

The 5-year adjustable-rate mortgage fell 18 basis points to 6.27%, marking its lowest level since February.

As mortgage rates declined, the mortgage application index for home purchases rose 1.6%, reaching its highest level since March. With the cost of financing for home purchases decreasing, there is speculation that the U.S. real estate market, which had been frozen by high interest rates, may have bottomed out and is beginning to rebound.

The drop in the 30-year fixed mortgage rate was driven by a decline in the 10-year U.S. Treasury yield, which serves as the benchmark for mortgage rates. This was due to a significant easing of inflationary pressures in May, which increased expectations for rate cuts within the year. The 10-year Treasury yield traded around 4.4% on the 11th, the day before the May Consumer Price Index (CPI) release, but has since fallen to about 4.21%.

According to the U.S. Department of Labor, last month’s CPI and core CPI rose 3.3% and 3.4% year-over-year, respectively, both below market expectations (3.4% and 3.5%) and the previous month’s figures (3.4% and 3.6%). The Producer Price Index (PPI), a leading indicator of CPI, also fell 0.2% month-over-month last month, missing expert forecasts of a 0.1% increase and significantly underperforming the previous month’s 0.5% rise. Additionally, May retail sales increased by only 0.1% month-over-month, below market expectations of 0.3%, further pushing down Treasury yields.

Despite the Fed reducing its forecast for rate cuts this year from three to one at this month’s Federal Open Market Committee (FOMC) meeting, investors are betting on the possibility of two cuts within the year. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market currently prices in about a 65% chance that the Fed will cut rates by at least 0.25 percentage points at the September FOMC meeting. The probability of a 0.25 percentage point cut in November is 79%.