Mortgage rates do not follow the Fed Funds rate, but instead loosely follow the yield on the 10-year Treasury. Still, the drop by the central bank is a result of high volatility in the markets on concern that the deadly coronavirus outbreak will impact the economy. That will keep investors in the bond market driving yields lower.
The average rate on the 30-year fixed mortgage, for borrowers with solid credit and a good down payment, hit 3.13% on Monday, matching its record low, according to Mortgage News Daily. Mortgage refinances are surging on the news, but it is not quite as clear a path for potential homebuyers. "If Treasury rates decline further, it is likely that mortgage rates will follow, giving more homeowners the incentive to refinance," wrote Joel Kan, an economist with the Mortgage Bankers Association. "For prospective buyers, low rates boost purchasing power, although some may also pause their home search given the uncertainty."
And there is also the possibility that the rate cut could turn rates slightly, although not dramatically, higher. "10 year Treasuries have benefited from panic, uncertainty, and economic concerns," wrote Matthew Graham, chief operating officer at Mortgage News Daily. "If a Fed rate cut helps ease those things, it's bad for longer-term rates."
It’s called a “FED Cat Bounce”
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