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ECB Bond Program, New Tax Plan Move Rates Higher

Overview: The two-month trend toward higher global bond yields continued over the past week, mostly due to the anticipated monetary policy tightening by the European Central Bank. Progress on tax reform in the U.S. was also negative for mortgage rates. As a result, mortgage rates ended higher.


Following the financial crisis in 2008, central banks around the world purchased large quantities of bonds to help boost economic growth. This added demand pushed yields lower, including U.S. mortgage rates. In 2013, the U.S. Fed began to talk about ending its bond purchase program, and global bond yields moved significantly higher. Just a couple of months ago, the European Central Bank (ECB) began to guide investors to expect a reduction in its bond purchase program. Much like the reaction to the Fed in 2013, the potential reduction in demand for bonds from the ECB has caused global bond yields to move higher. The ECB is expected to announce the details of its plans for future bond purchases on October 26.

Late last week, the U.S. Senate voted in favor of a 2018 budget plan. This was one of many steps needed to achieve tax reform. Investors viewed the progress on tax reform as negative for mortgage rates. A new tax plan likely would boost economic growth, which would raise the outlook for future inflation. In addition, it would increase the budget deficit. The added supply of bonds needed to fund the deficit would push yields higher.

The housing market data released over the past week was encouraging. The big surprise came from sales of newly built homes in September, which surged a massive 19% from August to the highest level since October 2007. Sales of previously owned homes in September also unexpectedly rose from August. Week Ahead

Looking ahead, the impact of Thursday's ECB meeting on U.S. mortgage rates will depend on the announced level of future bond purchases. After that, the first estimate of third-quarter gross domestic product (GDP) will be released on Friday. The core Personal Consumption Expenditures (PCE) Price Index, the inflation indicator favored by the Fed, will come out on October 30. The next Employment Report will be released on November 3. In addition, President Trump is expected to announce his nominee for the position of Fed Chair soon, and his choice could affect mortgage rates.

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