What’s Ahead For Mortgage Rates This Week : January 31, 2011

Mortgage markets improved this week as positive economic data was overshadowed by geopolitical strife. A flight-to-quality drove buy-side activity in mortgage bond markets, which, in turn, helped conforming rates fall across the state of Arizona.

Last week marks the first time this year that mortgage rates fell on a week-over-week basis, and considering why rates fell, it points to the fragile nature of the global economy.

By all accounts, last week showed that the U.S. economy is in recovery.

1. Housing data rises to its best levels in 8 months (LA Times)
2. Consumer sentiment hit a 7-month high (NPR)
3. Business investment increased 1.4% in December

Furthermore, the Federal Open Market Committee met last week and said that the economy continues to expand (although the pace is slower-than-optimal).

Normally, positive news like this would drive mortgage rates higher, and during the early part of the week, it did. But then, as political problems in Egypt grew larger, international investors began to shift money from their risky assets into the relative safety of the U.S. bond market.

This includes mortgage-backed bonds, of course. The buyer influx pushed up prices and, because bond yields move opposite price, mortgage rates dropped.

The week ended with rates at their lowest levels of the week.

Next week, though, rates could reverse. There's two developing stories rate shoppers should watch.

The first is related to Egypt. In addition to buying mortgage-backed bonds, investors are gambling that oil prices will rise, too. Egypt is the world's 21st largest oil producer and a disruption of its supply could send gas prices soaring. This circumstance would be inflationary and inflation is the enemy of mortgage bonds.

Crude oil jumped 4.3% Friday afternoon. If that continues, mortgage rates should start rising.

The second is tied to jobs. Last month's jobs data was weaker-than-expected on Wall Street and it sparked a mini-rally in mortgage rates to start the year. Jobs are paramount to economic recovery so if this month's figures are lower than the consensus figure of 150,000, expect mortgage rates in Phoenix to fall.  If the number is stronger than 150,000, expect mortgage rates to rise.

The jobs report is released Friday at 8:30 AM ET.