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Last Week in Review: The Cure for Higher Rates

Interest rates ticked up just slightly week over week. However, we might have seen a near-term peak in rates. Let's break down what happened and talk about what to watch for next week.
1. Inflation Remains High
The Consumer Price Index (CPI) for September showed prices are remaining persistently high and challenging the Fed's notion it will be "transitory".
CPI showed prices climbed 5.4% year over year, matching the hottest pace in 30 years. The more closely watched Core CPI, which strips out food and energy costs, rose 4.0% year over year. The Federal Reserve has the mandate to maintain price stability (inflation). The Fed's inflation target is to have core consumer prices run at 2 to 2.5% over the long run, so seeing prices running at nearly double that level is a concern if it is not transitory.
Inflation can increase when people "expect" to pay more. At the moment, both 5-yr and 10-yr inflation expectations are matching the highest levels of 2021. If those inflation expectations rise further, it will put upward pressure on rates. The opposite is true.
2. Fed Minutes Reveal the Taper Plan
Last Wednesday, the Minutes from the previous Fed meeting were released. This is where we get to read the dialogue amongst Fed members and their thoughts on the economy and monetary policy.
The most important takeaway was Fed Members agreeing to a timetable and plan to taper or scale back bond purchases. Here's what the Fed said back in September:
"The illustrative tapering path was designed to be simple to communicate and entailed a gradual reduction in the pace of net asset purchases that, if begun later this year, would lead the Federal Reserve to end purchases around the middle of next year. The path featured monthly reductions in the pace of asset purchases, by $10 billion in the case of Treasury securities and $5 billion in the case of agency mortgage-backed securities (MBS)". This is a very gradual scaling back of purchases. It is also important to remember that the Fed will continue to buy bonds daily during and after the taper, with proceeds from their existing portfolio, so this truly is a "scaling" back and not an end to bond buying.
"Participants noted that if a decision to begin tapering purchases occurred at the next meeting, the process of tapering could commence with the monthly purchase calendars beginning in either mid-November or mid-December." It's clear the Fed will likely start buying fewer bonds this year.
3. The Cure for Higher Rates is Higher Rates
There were some signs that mortgage-backed securities (MBS), Treasuries, and even bonds abroad hit rate peaks – highlighting that at some point, higher yields attract investors.
For instance, last Tuesday, there was a big 10-year Note auction that showed very high buyer demand. MBSs, last Wednesday, hit the lowest levels since March, but then bounced sharply higher.
Lastly, the German 10-yr Bund touched - 0.08% on Wednesday, which matched the highest yield in over 2 years. Since that time, the Bund yield continued to decline and is currently at - 0.18%. As yields decline abroad, it puts downward pressure on our yields.
Bottom line: We are watching to see if rates might have peaked in the near term, despite persistently higher inflation and the likelihood of the Fed tapering this year.

Last Week in Review: Three Other Things Moving the Market

Interest rates have ticked up the past 10 or so days after the Federal Reserve told the financial markets there is broad support to scale back bond purchases and finish those purchases by mid-2022. Let's talk about three "other" things moving the market between now and the next big Fed Meeting on November 3rd.
1. Debt Ceiling Debate
"We now estimate that the Treasury is likely to exhaust its extraordinary measures if Congress has not acted to raise or suspend the debt limit by October 18" - Treasury Secretary, Janet Yellen.
It's that time again. Our country needs to borrow more money to help offset the enormous amount of federal spending now and into the near future. To pave the way, Congress must raise the debt ceiling. This measure is nothing new. We have raised the debt ceiling over 15 times in this century alone.
Like most things in Congress, it's never a pretty process to watch and the past has shown some messy debt ceiling debates which did turn into some crises...but the limit was always raised.
In this politically charged environment, we should expect a lot of chaos and uncertainty as this process moves forward. Normally, chaos and uncertainty would help bonds, but they have not yet as the anticipation of the Fed tapering bond purchases remains an upward pressure on rates.
Note - Congress came to agreement on a stop-gap measure which will fund the government until December 3rd.
2. Infrastructure Spending Debate
On top of the debt ceiling debate, Congress is trying to push through $5T worth of spending through two different bills. It is not clear if and what will get passed. The plans do have an impact on rates and future Fed Reserve policy.
If any of the plans come to pass, the Treasury Department will have to issue new bonds to pay for the plans. Meaning, investors in the bond market must buy even more Treasuries each month than what is available today. This additional bond issuance can weigh on bond prices and cause an uptick in rates.
Should the entire $5T or so get passed, the Federal Reserve, which has been buying $120B in bonds every month to help keep rates low, may be forced to do more buying in the future. Otherwise, how can the US afford an uptick in rates with $29T in debt and growing? Someone must buy our debt.
3. Home Prices Record Rise
The Case Shiller Index showed home price rose 19.7% in July, a fourth consecutive record of home price gains. This kind of rapid growth is unsustainable and this "froth" in the housing market is the very reason why the Fed is being pressured to taper bond purchases, especially the purchases on the mortgage-backed security side.
An increase in rates would likely slow the price appreciation in homes. What is not clear is how it would affect affordability and overall demand over time.
Bottom line: We are now just a few weeks away from the next Fed Meeting and, at the moment, their policy response is the main driver of long-term rates. Should the Fed announce taper, rates may rise further. The opposite is true. Now is the time for folks to lock in long-term rates as a real threat of higher rates exists.

Last Week in Review: Fed Meeting Breakdown, Taper Cometh
Home loan rates ticked up and had a bit of a "taper tantrum" after the Fed meeting last Wednesday when Fed Chair Powell outlined the case to scale back or "taper" bond purchases. Let's break down what was said and what to look for in the weeks ahead.

"Asset purchases still have a use, but it is time to taper them." – Fed Chair Jerome Powell...Sept 22, 2021
The Fed has been purchasing $120B worth of Treasuries and Mortgage-Backed Securities since March 2020 to stabilize the financial markets and help pin down long-term rates. This effort has helped fuel the frenzy in both purchase and mortgage refinance activity.
Last Wednesday, during a press conference, Fed Chair Powell made it clear that the days of bond-buying are coming to an end and the scaling back of purchases may start before the end of the year. Here are some important quotes from the press conference:
"There is very broad support on committee for timing and pace of taper"
This is important as Fed Members are in alignment on the issue to taper, which means there is a good chance it is going to happen soon.
"There are some who would have preferred to go sooner due to financial stability concerns."
This line highlights the fear that some Fed Members have of inflation/price instability that comes with too much money in the financial system.
"Wouldn't put too much on inflation remaining above goal in Fed's current outlook."
However, Fed Chair Powell and most of the Fed believe the current high levels of inflation will be transitory or short-term in nature. The Fed forecasted Core inflation dropping down to 2.3% next year, which would be right in the Fed's sweet spot. If inflation moderates to those levels, interest rates may not be pressured higher, which allows the Fed to scale back bond purchases.
"Completing taper sometime around the middle of next year will be appropriate."
And for the first time, we have a timeline. The Fed is looking to scale back $120B a month in purchases to zero by mid-2022.
What's next? Mark your calendar as the next Fed meeting is Wednesday, November 3rd...that is the day markets feel the Fed will announce the taper start if they want to complete the tapering by mid-2022.
For the Fed to make a taper announcement in November, we likely need to see more progress on the labor market, which means the September Jobs Report, being reported Friday, Oct 8th is a big deal. If that report is solid, expect the Fed to make the announcement. If the report stinks, as some have of late, the Fed may not announce the taper.
Other unknowns which might delay a taper announcement include the debt ceiling negotiation, infrastructure debate, and signs of Chinese property bubbles losing air.
Bottom line: Now we know the Fed wants to taper and it may come as soon as November. This means it is very difficult for rates to improve much if at all from here. 

Home loan rates were mainly unchanged this past week. Let's break down what is threatening the financial markets and rates.

The Taper Threat
A big threat to stocks, bonds, and rates is when the Fed will announce a tapering or scaling back of bond purchases. Presently the Fed has been buying at least $120B worth of Treasuries and mortgage-backed securities (MBSs) every month. This Fed buying is the main reason why home loan rates remain near all-time lows.
With inflation elevated and froth in the housing market, there is growing pressure on the Fed to start buying fewer bonds - and there is speculation the Fed will start tapering by purchasing fewer MBSs.
No one knows what, if and when the Fed will do anything, but if the Fed buys fewer MBSs, home loan rates will likely move higher. Back in 2013, when the Fed mentioned the word "taper" home loan rates shot up 2.5% over the next 6 months. The Fed knows this and is trying to scale back purchases without causing a similar disruption.
The next Fed Meeting Monetary Policy Statement will be released on Wednesday, Sept 22nd at 2:00 p.m. ET. We will find out soon enough if the Fed is confident enough to scale back bond purchases and not trigger a taper tantrum reaction in the bond market as we saw back in 2013.
The Tax Threat
The Administration and Congress are trying to pass a $3.5T spending plan that will include various tax hikes. There is a concern in the financial markets that a broad range of tax hikes could lead to slower economic growth, at a time when economic growth is already decelerating. Stocks don't like the idea of slower growth and have been under selling pressure of late as details of the $3.5T plan have emerged.
Normally bonds and rates would do well when stocks suffer. But that has not happened this past week. Bonds are worried about the taper threat and the idea that a large $3.5T plan could put upward pressure on rates as the bond market has to absorb all the new bond issuance required to fund the enormous spending plan.
Much like the taper threat, no one knows how big the spending plan will ultimately be and what taxes will be included. Once something is close to being passed, stocks, bonds, and rates will react accordingly.
Bottom line: We do not know if the Fed will also announce a "modest" tapering in bond purchases next week or how the bond market will react. At some point, the Fed will have to scale back purchases and when it does, we should expect an increase in rates.

Last Week in Review: ECB Scales Back, No Tantrum - Yet.

Home loan rates have bounced around the past couple of weeks in response to good, bad, and even some ugly news. Let's break down last week's big news and what it means to the housing market and economy.
The European Central Bank (ECB) Buying Fewer Bonds
Last Thursday, the ECB announced it is going to "modestly" reduce the pace of their pandemic emergency purchase program (PEPP) bond purchases.
The PEPP, which started in March 2020, will end next March with bond purchases totaling 1.87B euros.
"The Lady isn't tapering" – ECB President Christine Lagarde 9/9/21
It is worth noting, the existing Asset Purchase Program (APP) that purchases 20B euros in bonds per month will continue and, this taper announcement does not signal an interest rate liftoff.
In response to the well-telegraphed ECB action, bond yields in Europe were mostly unchanged which helped U.S. interest rates remain near unchanged.
This big question: Will the Federal Reserve taper bond purchases here at home?
It is not uncommon for central banks to work in unison with monetary policy, meaning now that the ECB has dipped its toe in the water to slow bond purchases, maybe the Fed can do the same.
There have been many calls to taper the mortgage-backed security (MBS) side of the purchases due to the "froth" in the housing market.
However, we are seeing incredible slack in the labor market while consumer confidence and sentiment have declined as COVID remains a threat to economic progress.
The next Fed Meeting Monetary Policy Statement will be released on Wednesday, Sept 22nd at 2:00 p.m. ET. We will find out soon enough if the Fed is confident enough to scale back bond purchases and not trigger a taper tantrum reaction in the bond market as we saw back in 2013.
Bottom line: We do not know if the Fed will also announce a "modest" tapering in bond purchases or how the bond market will react. At some point, the Fed will have to scale back purchases and when it does, we should expect an increase in rates.

Last Week in Review: Congress Printing, Fed Exiting

Among the many stories happening this past week, the elephant in the room remains Afghanistan. There is so much uncertainty and it isn’t clear when, how and if it ends. In challenging times like these, bond prices and rates typically improve, but they didn’t. Rates crept higher week over week. Let’s break it all down and discuss what to look for next week.
Cranking up the Printing Press
Congress is preparing to vote on nearly $5T on spending next year. That is a serious amount of money, and it comes with a cost. First, the Treasury must sell bonds in weekly auctions in order to create the money to spend.
This means we need buyers, and a lot of them to purchase all this paper. These buyers must also be confident that the bonds don’t decline in value causing a capital loss sometime in the future.
What would cause bond prices to decline and rates to move higher? Here are a few things that could cause higher rates:
Persistently high inflation: At the moment, we are seeing very high year-over-year inflation, but the Fed says it will be mostly “transitory” or temporary in nature. If the Fed is incorrect and inflation remains persistently high, rates must creep higher. The Consumer Price Index, CPI, is currently 5.3% annually, more than three times higher than our 10-year yield, currently sitting at 1.35%. Inflation being higher than Treasury rates is an unsustainable trend but, there is a big reason why it exists today.
The Fed stops buying bonds: The Fed is currently purchasing at least $120B in Treasuries and Mortgage-backed securities every month. There are calls to taper and stop purchasing bonds. If and when the Fed exits, rates could move sharply higher, much like they did back in 2013 – hence the term “taper tantrum”.
U.S. Dollar decline: Should the enormous spending plan be passed; it could have a negative effect on the US Dollar. When the dollar declines, it makes US dollar denominated commodities like Oil more expensive, thereby lifting prices and causing inflation.
Bottom line: There is a lot of uncertainty in Afghanistan, Washington DC and the Fed. We don’t know if these spending bills will even pass or if conditions warrant the Fed to taper anytime soon. However, if and when the Fed signals they are exiting their bond buying program, rates are likely headed higher and possibly in a hurry.

Last Week in Review: The Tug a War at Play

What a week!!! The elephant in the room is the uncertainty and chaos within Afghanistan. Bonds and rates embrace such chaos but that wasn't the case this week as the threats of Fed tapering limited any rate improvement. Let's break it all down and discuss what to look for next week.
Bad Times = Safe-Haven
What is happening in Afghanistan is highly uncertain and no one knows how, when, or even if the chaos will end. In these moments, the U.S. benefits from being the "reserve" currency of the world, where investors flee to park their money in the "safe-haven" of the U.S. Dollar.
When this happens, it is important to know that Treasuries like the 10-year Note can improve in rate, materially at the expense of almost everything, including mortgage-backed securities (MBS) and home loan rates.
So, while we have endured troubling images with no clear picture of what is to happen next, why haven't home loan rates improved?
Good Times = Fed must Taper
There is growing fear in the bond markets that the Fed will announce the tapering of their bond purchases because we are seeing better economic times with higher inflation and improved labor market conditions. Moreover, there are calls for the Fed to taper because of the froth in the housing market with rapidly rising home prices and supply costs.
This is very important to homeowners and anyone who buys or sells loans. The Fed is currently committed to buying "at least" $40B in MBSs every month. And lately, rates have ticked higher despite the Fed buying as much as $5B a day in MBSs.
What will happen when the Fed announces they will start tapering bond purchases? Well, there are many "experts" who suggest the bond market already sees it coming and won't be too largely disrupted. Then there is the other position that witnessed mortgage rates shoot 2.5% higher in rate back in 2013, when Fed Chair Bernanke uttered the tapering words.
It is why the term "taper tantrum" exists – the bond market sold off sharply with rates spiking on the notion the Fed will no longer be the buyer of last resort.
Bottom line: It's not clear the economy is performing strong enough to warrant tapering just yet. There is the "ugly", meaning COVID and now Afghanistan which may be enough for the Fed to hold off on tapering for more clarity.

Last Week in Review: Taste of Taper Tantrum

Home loan rates have crept higher over the last couple of weeks on fears the Fed may taper their bond purchasing program sooner, rather than later. Until now, housing, interest rates, and the financial markets have enjoyed the benefits of the Fed monetary policy and the bond-buying program. Let's break down what has happened of late in this mini-bond market taper tantrum and what it means for you.
To Taper or Not to Taper
There is increasing pressure for the Federal Reserve to taper their bond purchasing program.
The Fed has a dual mandate of promoting maximum employment and maintaining price stability. On the employment side of the mandate, the labor market recovery is uneven. Yes, the headline unemployment number fell to 5.4% last Friday, but the Labor Force Participation Rate (LFPR) remains at stubbornly low levels. The LFPR measures how many people are actively working or searching for a job, hence they are "participating." Moreover, there are over 10M available jobs in the U.S., a record high.
So, while the headline unemployment number looks low, the high amount of people not participating, and a record number of help-wanted signs posted remain a concern. It may be enough reason for the Fed to not taper just yet.
On the inflation portion of the Fed's mandate, the consumer price index was reported on Wednesday and the reading came in a little less hot than feared, which was a good thing for the bond market. The Fed has been saying that high inflation would be transitory or short-lived, so seeing a retreat in prices would be another reason for the Fed not to taper just yet.
But then there's housing. Home prices have skyrocketed year over year in response to soaring lumber prices, commodity prices, and scorching demand. This has caused housing affordability problems for many. One way many suggest cooling off the housing froth is for the Fed to taper their Mortgage-Backed-Security (MBS) purchases. It's these purchases that directly affect home loan rates and is a major reason why a thirty-year mortgage continues to hover near 3% - for without the Fed buying over $50B of MBS per month, of late, home loan rates would be much higher.
Bracing for Jackson Hole
Many suspect the Fed will announce their intentions to taper MBS purchases at the Jackson Hole Symposium, August 26 through 28th. No one knows if the Fed will make that signal or if they will wait and hide behind some of the weak labor market components and cooler inflation.
Bottom line: For anyone considering a mortgage, either refinance or purchase, now is the time. The increase in rates we have seen over the past couple of weeks is just a taste of what higher rates would look like if the Fed were to signal their intention to taper MBS purchases.

Last Week in Review: Three Things Moving the Markets

This past week long-term interest rates dropped to the lowest levels in six months but things changed in a "New York Minute". Let's break down three things that moved the markets and what to look for in the week ahead.
1: "The path of the economy depends on the course of the virus." - Fed Statement.
COVID continues to linger causing disruption and restrictions in economic activity. The stall in vaccinations and uncertainty surrounding the Delta and Delta Plus variant has been enough to cause investors to flee into the safe-haven of the U.S. Dollar and U.S. Dollar-denominated assets like Treasury and Mortgage-backed securities (MBS). Note, the 10-year Note yield has been seeing outsized rate improvement versus mortgage rates…this as the safe-haven trade typically sees more money flow into Treasuries than any other asset. So, while mortgage rates did improve week over week, they did not improve like the 10-year yield, which dropped sharply to 1.12% midweek.
2: Mixed signals on half the Fed's mandate.
The Fed has a dual mandate to promote maximum employment and maintain price stability. On the employment front, the US economy is underperforming and receiving mixed signals. The recent Weekly Initial Jobless Claims data, a leading indicator on labor market health, has shown increases in those looking for unemployment benefits - this was not good. Wednesday's ADP Report came in at half of expectations, suggesting private companies didn't create that many jobs. However, the July Jobs Report showed 943,000 jobs created - which was a strong headline number. Lastly, looking under the hood of the report, the Labor Force Participation Rate didn't move and remains stubbornly low - meaning there are less people "participating" in the labor force. If less people are working or actively looking for a job, that is a bad thing.
What does this mean? Until the Fed sees "substantial further progress towards its dual mandate," including maximum employment, the Fed will continue to buy bonds at the current $120B per month rate. The strong headline Jobs Report will reinvigorate the bond taper talk, which will increase volatility in the weeks and months ahead. For homeowners, it also means now is the time, while the Fed continues to artificially hold rates lower.
3: The U.S. is the place to be.
The U.S. is outperforming the rest of the globe from an economic standpoint, and we are also seeing the largest policy response from the Fed and Administration which attracts global investment into U.S. markets. Additionally, while our 10-year Note is yielding an anemic 1.19% as of Thursday, it is a relatively "juicy" yield when compared to the 10-year German Bund, which is -0.50% or the Japan 10-year Government Bond (JGB) which yields 0.0%.
So, even though our 10-year Note yield may look like a bad investment because the yield is far beneath the long-term inflation rate, it is far better than any other bond yield around the globe. This dynamic pushes foreign investors to "park" their money in our Treasury market - leading to lower rates.
Bottom line: Interest rates are at the best levels seen since mid-February, making it a great opportunity to secure a home loan. For anyone considering a mortgage, now is the time. 

Last Week in Review: The Fed is All Talk and No Action

This past week long-term interest rates still continue to hover at multi-month lows after the Federal Reserve maintained their position with interest rates and their bond-buying program. Let's break down what the Fed said and what to look for in the weeks ahead.
"Until substantial further progress has been made"
This may be the most important line of the Fed Monetary Policy Statement.
The Federal Reserve has a dual mandate to maintain price stability and promote maximum employment. Here the Fed is clearly saying they need to see "substantial" progress towards this dual mandate before they can signal tapering bond purchases and ultimately hiking rates. With over a record 9 million jobs available in the U.S., it is going to take some time before the Fed will consider changing its current position.
Stocks, bonds and rates liked the idea that the Fed will continue to buy bonds and "pump up" the markets, despite many economists saying "we don't really need it".
"Inflation has risen, largely reflecting transitory factors"
Inflation is the arch-enemy of interest rates, so it is this portion of the Fed mandate Mr. Powell had to defend in his press conference. He was very clear that his definition of high inflation is something that remains "persistently high" for a "persistent" amount of time. So, we will not know if higher inflation is transitory for several months. In the meantime, bonds don't appear to be worried about inflation as the 10-year Note yield hovers beneath 1.30%.
There is a famous market saying: "Don't Fight the Fed." If the Fed says they need to see "substantial" further progress towards their dual mandate and 9 million jobs remain available...we should expect the Fed to maintain its current position and make no changes on its monetary policy.
Providing further cover for the Fed to hold its position is the renewed COVID fears related to the Delta variant, along with some more restrictions. Think lower for longer as it relates to interest rates.
Bottom line: Interest rates are at the best levels seen since mid-February, making it a great opportunity to secure a home loan. For anyone considering a mortgage, now is the time.