With little economic data, it was a relatively quiet week for mortgage rates. The biggest economic news was a surprise warning from a major rating agency that it may downgrade US debt, but investors viewed this as positive for bonds. As a result, mortgage rates ended the week a little lower.
On Monday, S&P unexpectedly announced that it had lowered its outlook for US debt due to growing budget deficits. Basically, this means that S&P sees a higher risk that they will need to downgrade the credit rating for US debt over the next couple of years. A lower credit rating would increase the yield required by all investors to purchase US debt to offset the higher perceived risk. In addition, some investors are not permitted to own lower rated debt, and the selling from these investors would add further upward pressure to yields.
In recent months, similar warnings pushed yields higher in smaller European countries such as Greece and Portugal. The immediate reaction to Monday's S&P announcement was a rise in US bond yields as well, but yields soon moved lower as lawmakers began to use the news to support their plans for deficit reduction. Investors expect that the threat of a lower debt rating will make it easier for politicians to make difficult cuts in government spending. In short, what would normally be bad news for mortgage rates actually helped them improve.
The biggest economic event next week will be Wednesday's Fed meeting. For the first time, the Fed Chief will hold a press conference after the meeting to discuss the Fed's announcement. No change in rates is expected, but investors will be looking for hints about when the Fed will begin to tighten monetary policy.