After reaching record lows near the end of July, mortgage rates have moved steadily higher this month, and the trend accelerated this week. While the US economic data was roughly neutral and there was little news out of Europe, mortgage rates continued to rise.

Prior to July 26, two primary factors were responsible for the decline to record lows. First, the European debt troubles caused investors to shift to relatively safer assets, including US mortgage-backed securities (MBS), and mortgage rates are largely determined by MBS prices. Second, slower economic growth reduced inflationary pressures and supported low mortgage rates. While the troubles in Europe and sluggish growth rates are likely to remain for quite a while, what changed is that investor expectations on both fronts have improved this month, which has been negative for mortgage rates.

On July 26, the President of the European Central Bank (ECB) declared that the ECB will do “whatever it takes” to preserve the European Union (EU), and Germany’s Chancellor made similar comments this week. This raised expectations that the ECB will provide additional aid and help prevent the troubles from spreading. As a result, investors have partially reversed the flight to safety trade, lifting stocks and hurting mortgage rates.

The stronger than expected July Employment report released on August 3, this week’s Retail Sales report, and improving housing sector data have raised the outlook for US economic growth. In typical fashion, as expectations have improved, mortgage rates have moved higher.

Next week, Existing Home Sales will come out on Wednesday. The detailed Minutes from the August 1 Fed meeting also will be released on Wednesday. The Minutes often provide additional insight into the debate between Fed officials. New Home Sales will be released on Thursday. Durable Orders, an important indicator of economic activity, will come out on Friday.

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