After a tame Consumer Price Index report Friday, mortgage bonds staged a brief rally and rates retreated slightly.

Earlier in the week, mortgage rates were at their highest point in almost a year. 

Unfortunately for rate shoppers, mortgage investors are behaving like Dr. Jekyll and Mr. Hyde right now.  One moment, they hate the outlook on inflation; the next, they love it. 

What’s really confusing is that data points that made mortgage rates move higher or lower 6-9 months ago (i.e. jobs report, crude oil prices, housing stats) are now being discounted. 

Broader data points such as CPI seem to have taken center stage. 

At least for now.

This week, there are virtually no data points of consequence aside from Tuesday’s Housing Starts data.  Given last month’s seasonable weather across the county, don’t be surprised if the number surprises to the hot side.

So, without data, expect mortgage rates to respond to external factors, technical trading factors, and/or irregular weather patterns.

 The American Consumer keeps spending.              

This morning, the monthly Retail Sales report showed a larger-than-expected jump.  Even after stripping out elevated gas prices, the sales increase was more than double the expected amount. 

The economy surges ahead, fueled by everyday spending, and this does not bode well for the future of mortgage rates.

The recent run-up in mortgage rates is largely from inflation fears.  With inflation, investors’ dollar-denominated securities have less value over time because the dollar itself is worth less. 

Runaway consumer spending exacerbates the potential for an overheated economy and that is why today’s figures are slightly troubling.  Each time you and I make a purchase, we are (in small way) contributing to the economy’s growth.

Inflation, of course, is the enemy of bonds and your mortgage rates are determined by the prices of mortgage bonds.  Inflation erodes the value of the bonds and that is what causes mortgage rates to increase. 

As a homeowner, higher mortgage rates may depress your local market because fewer home buyers can qualify for home loans, lowering overall demand.

Rates are up by as much as 0.875% in the past 3 months.

If you ever wanted proof that mortgage rates react to global events, the past four days are it.  

Worldwide, investors are shunning the United States mortgage market in search of higher returns elsewhere.

The more they sell, the worse mortgage rates get. 

The latest catalyst for extra supply: speculation about a Bank of Japan interest rate increase coming soon.  The Japanese central bank meets Thursday and Friday and is expected to hold its overnight lending rate at 0.500% although Finance Minister Omi has hinted at future rate hikes. 

Japan is a major player in the U.S.-based mortgage bond market so the thought of higher returns at home is putting mortgage bonds on the market and forcing prices down.

As always, prices down, yields up.  And the carnage continues.