No Budget Deal

Congress failed to reach a budget deal for the new fiscal year, causing a partial government shutdown for the first time in 17 years. The impact on mortgage rates was surprisingly small, though. The reduced number of economic reports released last week also caused little reaction. Mortgage rates ended the week a little lower.

While the shutdown has caused disruptions in the mortgage origination process, the effect on mortgage-backed securities (MBS) prices, and therefore mortgage rates, has been minor. With respect to the shutdown, bond market investors adopted a wait and see attitude. The much more significant issue is the debt ceiling. According to the Treasury, the government will reach its borrowing limit around October 17. If Congress does not raise the limit, there is a risk that the government technically will default on its obligations. The results of this unprecedented event could be severe for the economy and financial markets. At this point, though, few investors believe that Congress would actually allow the US to default.

One consequence of the shutdown is that economic reports produced by government agencies are not being released. The first Friday of each month is usually notable for the reaction to the Employment report, but this month's data has been delayed. Investors were forced to adjust their outlooks based on the less significant labor market data which did come out during the week, including the ADP forecast and Jobless Claims. These reports showed little change from recent readings, though, and had little impact.