Mortgage rates moved slightly higher today, but only after moving slightly lower earlier this morning.  

"Higher" and "lower" are more informative if we're dealing with a well-defined starting point, so let's deal!  From a starting point of last Friday afternoon, the average mortgage lender moved very slightly lower with the initial rates published on Monday morning.  In the broader context, those rates are still quite high with only a handful of days over the past 3 months being any worse.  Prior to June, you'd have to go back to 2008 to see higher rates.

All that to say the modest improvement seen this morning was "nice," but not exactly cause for celebration.  Even then, the improvement didn't last long.  The underlying bond market (which dictates rates) began losing ground after a scheduled auction of 10yr Treasury Notes.

10yr Treasuries don't directly determine mortgage rates, but quick moves in the 10yr tend to impact the bonds that specifically determine mortgage rates.  The correlation can be stronger or weaker depending on the day.  Today was actually a bit better for mortgage-backed bonds, but that's really only an anecdote that sets up a warning.

10yr Treasuries had it worse than mortgage bonds today because the average mortgage isn't expected to last 10 years right now.  In other words, if mortgage bonds had to pick a Treasury security to emulate in terms of life-span, a 5yr or 7yr note would be a much better choice (some might even say the 3yr, but that depends on things happening in a fairly specific way over the next 2 years).

Why does any of that matter?  It all comes back to Fed policy.  Bonds are rates and rates are bonds.  If a 10yr Treasury asks an investor to lock in a rate of return for 10yrs, and the average mortgage bond asks investors to expect roughly half that time frame, the Fed Funds Rate applies to loans that last for less than 24 hours.  Granted, the longer the market expects the Fed Funds Rate to remain at a certain level, that 24 hour time frame can end up being more like a few years in practice, but that assumes the market is correctly predicting where the Fed's rate will be in the future.

Due to that uncertainty, the Fed Funds Rate (the thing the Fed actually has the power to "hike" or "cut") falls on the shortest end of the life-span spectrum.  Life-span or "duration" as the bond market says, is a key consideration for traders.  You may have heard of an inverted yield curve over the past year.  That's when longer duration bonds offer lower returns than those with shorter life-spans.  

Thin about that for a second.  If you're an investor seeking to buy bonds to lock in a guaranteed rate of return, why would you tie up your money for 10 years at a rate of 3.35% if you could only tie it up for 2 years and make 3.57%?  Those are actual numbers from today, by the way.  The oversimplified answer is that you wouldn't!  Not as long as you knew you could lend money at 3.57% every 2 years for the next 10 years.

But you have no way of knowing if 2yr rates will remain that high again and again and again each time you need to reinvest.  If 10yr yields are currently lower, that's the market's way of saying it doesn't see short-term rates staying that high for 10 years either.  But it DOES see a ton of upward pressure on short-term rates right now due to the Fed's efforts to fight inflation.

How does the Fed fight inflation?  It has a few tools, but the primary strategy is to raise the Fed Funds Rate, thus making the cost of capital higher and slowing the flow of credit to businesses and consumers.  The hope is to push "demand" lower which, in turn, should put downward pressure on prices (aka "supply").  

So what's the warning regarding mortgage rates?  Simply put, there is an important inflation report tomorrow and additional economic data throughout the week.  The Fed will consider that data when deciding how much to hike the Fed Funds Rate next Wednesday.  If inflation is higher than expected and if data is strong, the market will increasingly expect the Fed to revise the rate hike outlook even higher than it already is.  And that would be worse for mortgage rates than 10yr Treasuries because the bonds that underlie mortgages currently have more in common with the shortest-term rates.

Bottom line: higher Fed rate expectations = more upward pressure on shorter-term rates relative to longer-term rates, and mortgages are shorter-term than 10yr Treasuries. This same principle in reverse is why today's bad 10yr Treasury auction didn't hurt mortgage rates as much.