Interest rates do not seem to have a break. February was one of the few months in the past 2 decades that resulted in a 0.50% increase in the mortgage rate. Despite hopes to the contrary, March was not a great start, either. Paradoxically, this drama of fees means that everything is going according to plan.
Why is that?
Because the “plan”, in this case, is to win the war against the pandemic. This is a multifaceted issue, of course, and the war is far from over. But most battles have deleterious effects on rates when they are doing well.
At the most basic level, as greed recedes, the economy improves and a strong economy is the quintessential inspiration for raising rates.
Inflation it is a concept closely related to general economic growth because more “demand” in the economy results in higher prices, if all other things are equal. Inflation is also the enemy of bonds / rates (ie, higher inflation = higher rates).
There is a healthy debate now about how much inflation is actually causing the recent rate hike. Some give almost all credit to hyperinflation fears while others are not too concerned. The following chart puts things in context. The orange line shows how traders are really betting on inflation, moment by moment, and the blue line represents the real 10-year yields of the Treasury. If inflation were the only factor, these lines would be rising at the same pace.
This does not mean that inflation is not a relevant fear for rates. It is certainly contributing to higher rates in the slightly longer term (but not so much last month). Here is the same graph with a much broader view:
As far as the Federal Reserve is concerned, any large increase in inflation in the short term will be a temporary by-product of supply restrictions and computational factors related to covid. Specifically, the “year on year” numbers will soon be based on the months of 2020 that had extremely low inflation (that is, compared to April 2020, April 2021 will probably always look very high).
The Fed will continue to buy Treasuries and Mortgage-Backed Securities (MBS) until it is sure that its objectives have been achieved, both in terms of inflation and the labor market. Fed Powell President reiterated that commitment once again in a webcast during the WSJ Jobs Summit on Thursday, but this stance is so well known that it was little comfort for those in the growing rate movement.
For some reason, some traders began to speculate that Powell and the Fed would throw a bone in the bond market after several weeks of fast-rising rates (ie, saying or doing something to bring rates back up a bit). This is not necessarily far-fetched, but the buzz was centered on “Operation Twist“- an earlier Fed policy that involved selling shorter-term bonds and buying an equal amount of longer-term bonds. In doing so, the Fed could continue to spend the same amount of money at the same time it pushed down the long-term rates that benefit consumers.
Just one problem: the Fed was very clear in saying that this is out of the question. It was a possibility in late 2020, but they unanimously rejected it. Several Fed speakers have reiterated this decision in recent months. In addition, in recent weeks, as rates have increased, almost all Fed speakers have made some combination of the following points:
- the rate hike reflects broad economic optimism and progress against the pandemic
- rates at these levels are not a concern
In other words, rates of rapid increase are a logical by-product of what is happening to the economy, covetous case counts and vaccination progress. They are “good news” even if it’s bad news for fans of low mortgage rates.
Powell followed the same route, and the markets adapted slightly. The chart below shows Powell’s reaction along with the other 2 noticeable rate spikes of the week, one driven by Europe and the other by a strong employment report.
Conclusion: rates have gone up for well-known reasons, even though the pace has surprised some. With the Fed basically endorsing the rate hikes as evidence of progress, don’t be surprised if the pace can continue to – well … surprise you.
Turning to mortgage ratesspecifically, the week ended with 30-year flat rates well in line with its highest levels in almost a year. Most mortgage rate headlines do not mention this because they are based on Freddie Mac’s weekly survey, which has not yet reached reality on the front lines (especially for refinancing rates, which are slightly higher than purchase rates. ).
The peak of the 2021 rate has been around long enough to lead to a visible toll on mortgage applications. The definitive levels are still very strong, and there are other factors at play, of course, but the correlation is solid. Notably, the peak rate appears to have had greater implications for the buying market, but previous precedents suggest an even greater supply of “other factors” behind this movement (meaning purchases are not likely to be so bothered by rising rates). , nor do they tend to respond so quickly).
So it’s there any hope? Can rates return to levels below 3% soon? Will they continue to rise much more?
Be ready so that rates are stubborn in moving down quickly. The economy has a lot to expect. It would take some time for some of the more economically pessimistic scenarios to work in a way that would help rates significantly. If we see things improve in the short term, it will probably result from behind-the-scenes business motivations that have nothing to do with economic growth, inflation or Fed policy. In other words, they would be largely technical in nature and therefore it is not something to plan.
How about actions? If the stock goes down, could that help the bonds / fees?
It may help to some extent, but I would warn anyone against expecting high rates to cause sustained stock sales that, in turn, help rates fall. This was a common refrain in late 2018, but it certainly wasn’t that simple. In addition, the two deadlines are different in several important ways. Will you be able to see stock prices and bond yields move like that? Yea…
But this move does not always mean that rising rates are hurting stocks. Most importantly, the conclusion can change when we zoom out.
So it’s there any remnant of hope?
Absolutely! There is always hope. The rates only increase to a certain extent, so quickly before the market corrects. While it is impossible to know how the new realities of the pandemic will affect normal weather and the scope of such things, it is no less certain. If you need a rate chart to help put the super big picture in perspective, the past 10-year earnings decades are always a solid choice.
