Tax bill may cause mortgage rates to temporarily spike

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The tax bill Congress sent to President Trump's desk this week is likely to prompt at least a short-term spike in mortgage rates, according to Freddie Mac.

30-Year FRM 15-Year FRM 5/1 -Year ARM
Average Rates 3.94% 3.38 3.39
Fees & Points 0.5 0.5 0.3
Margin N/A N/A 2.75

Mortgage rates rise and fall in line with the yield on 10-year Treasury notes, which has hovered around 2.5% since congressional Republicans passed the tax reform bill, an increase of about 15 basis points from a week ago, when the yield was 2.35%.

The 30-year fixed rate mortgage averaged 3.94% for the week ending Dec. 21, an increase of one basis point from the previous week, according to Freddie Mac.

However, "the majority of our survey was completed prior to the surge in long-term interest rates that followed the passage of the tax bill," Deputy Chief Economist Len Kiefer said in a press release. "If those rate increases stick, we'll likely see higher mortgage rates in next week's survey."

Zillow, which has its own rate tracker, said the average for the 30-year FRM increased 6 basis points from the previous week, with the upward movement taking place after Congress approved tax reform.

"After holding steady in a narrow range for much of last week — even after the Federal Reserve increased its benchmark short-term interest rate — mortgage rates increased sharply on Tuesday to their highest level since late October," Zillow senior economist Aaron Terrazas said in a press release. "While the increase coincided with the passage of tax reform legislation in Congress, the effects of the reform were already largely priced into markets."

Still, mortgage rates remain low relative to where they were one year ago, Kiefer said.

Even with the Dec. 20 increase, "the 10-year Treasury yield is down from a year ago, and 30-year fixed mortgage rates are 36 basis points below the level we saw in our survey last year at this time," he said.

Going forward, because it is the last week of the year, things are expected to be slow, said Terrazas.

"Beyond inflation and output data due later this week, markets should be relatively quiet moving into the Christmas holiday. Low trading volumes this time of year could exaggerate smaller movements that would not have as much of an impact during normal trading times," he said.

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Mortgage rates forecast Mortgage rates Treasury bonds Tax reform Freddie Mac Zillow Treasury Department