Mortgage rates saw a sharp decline on Tuesday, dropping to levels not seen since late 2022, as investors in mortgage-backed securities positioned themselves ahead of an anticipated Federal Reserve rate cut. According to Mortgage News Daily, the average rate on the 30-year fixed mortgage fell by 12 basis points from Monday, landing at 6.13%.
This sudden drop is reminiscent of market behavior in September 2024, when mortgage rates also fell ahead of a widely expected rate cut. At that time, however, rates paradoxically rose immediately after the Fed’s decision. Market watchers caution that history could repeat itself, though outcomes remain uncertain.
Analysts point out that such movements are not new. Looking back to 1980 and the nine separate Fed rate cut cycles since then, distinct patterns emerge depending on the broader economic context. During periods of recession, cuts have historically led to a decline in longer-term yields, including the 10-year and 5-year Treasury notes, which in turn can pull mortgage rates lower. By contrast, in non-recessionary environments, cuts tend to have little to no lasting impact on long-term rates.
With expectations that the Fed may reduce rates by 25 basis points, and potentially follow with another 25 basis point cut, attention is focused on whether these actions will significantly influence the long end of the yield curve. Some experts argue that even if the Fed trims 50 basis points from short-term rates, the effect on longer-term yields is likely to be minimal in the current environment.
Another factor shaping expectations is market psychology. Many investors may be positioning themselves in anticipation of the Fed’s move, effectively “buying on the rumor.” Once the official announcement is made, some believe markets could respond with a “sell on the news” dynamic, particularly in the 10-year Treasury. This could trigger a modest rebound in yields after the Fed delivers its decision, reducing some of the downward pressure on mortgage rates.
Despite the recent dip, the consensus among some market leaders is that yields are currently sitting below levels they are likely to sustain in the coming weeks. With volatility driven by both investor sentiment and policy uncertainty, borrowers and lenders alike are keeping a close watch on the Fed’s next steps and the broader economic signals that will shape long-term borrowing costs.
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