Mortgage rates have taken a significant dive today, reaching levels not seen since late 2022 as they closely mirror the fluctuations in the bond market. This movement highlights a strong correlation between mortgage rates and bond prices, which tend to interact closely over time.

However, there are instances where one can unexpectedly surge while the other lags behind. Today’s drop was largely driven by robust performance from bonds yesterday afternoon and specific dynamics within the mortgage bond market itself.

To simplify, when investors shift their preferences towards lower interest-rate categories within mortgage-backed securities (MBS), this transition paves the way for rates to decrease into those favorable brackets.

A Familiar Pattern?

This scenario feels reminiscent of September 2024 when mortgage rates were similarly affected by expectations ahead of a Federal Reserve meeting, which hinted at a nearly certain rate cut. Remarkably, after that anticipated cut, mortgage rates actually increased—a situation that could repeat itself now, though it remains uncertain.

Last year's rate cut did not directly trigger rising mortgage rates; instead, it was a positive shift in economic data during early October that shifted the landscape. This trajectory suggests that upcoming mortgage rates will heavily rely on the economic indicators that are released in the forthcoming weeks.

What to Expect Next?

With the Fed's quarterly update on member rate outlooks—often called "the dot plot"—scheduled for tomorrow, there’s potential for dramatic fluctuations in the market.