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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.

Last Week in Review: Markets do the Safety Dance

Last week's long-term rates and home loans rates touched the lowest levels since early February mainly due to rising concerns over the Delta variant of COVID causing more restrictions, shutdowns, and a slowing economy in the future. Let's talk about what this "safe-haven" trade into the bond market means and what to look for in the days and weeks ahead.
Safe-Haven Trade Explained
During times of high uncertainty around the globe, much like we saw this week with Delta variant fears, we see what is called a "safe-haven" trade. This is where money flows into the safety of the U.S. Dollar and dollar-denominated assets like Treasury and mortgage-backed securities (MBSs), all at the expense of stocks that are deemed risky.
This past Monday, we watched the Dow Jones Industrial Average fall over 700 points, while both Treasury and MBS prices jumped as the safe-haven trade was on.
What Happened?
By midweek long-term rates ticked higher, erasing all the fear. Markets tend to overshoot both to the upside and downside, so by Tuesday, when "cooler heads"prevailed, stocks rallied sharply, erasing all their Monday losses at the expense of bonds and rates.
The reality is that the economy continues to improve, albeit more slowly, but it also means the Fed is not likely to make changes to interest rates or its bond purchase program anytime soon. If rates stay low and the Fed is not changing course, then it's always a reason for stocks to party and move higher.
On top of the Fed, the Administration is about to embark on another several trillion dollars in spending, intending to boost economic activity.
Now we can only hope and pray the fears surrounding the new Delta variant come to pass. For now, the markets' fears have been short-lived. We will get a better sense of reality in the weeks ahead as the U.K. just lifted all their COVID restrictions.
Inflation's Role
For the past couple of months, consumer prices (inflation) have run above 30-year mortgage rates for the first time in 50 years. This is the definition of unsustainable. At some point, either inflation must come down a lot, mortgage rates must rise, or a combination of both.
It's no wonder the Fed is buying MBSs. Who in their right mind would purchase MBSs when the interest received is not even outpacing inflation?
The Time Is Now
Could rates go lower? Sure. For that to happen, it would likely take something very bad, like a COVID-induced economic stall becoming reality. The markets are not pricing in that scenario right now.
Next, the Fed is under pressure to start tapering their MBS purchases. It may not happen for some time, but when the Fed announces their intention to do so, home loan rates will move higher in a hurry, and today's rates will be in the rear-view mirror.
Bottom Line: For the reasons mentioned, this is an incredible interest rate opportunity.

Last Week in Review: Powell Showers the Bond Market with Love

This past week long-term interest rates spiked higher in response to a hotter-than-expected consumer inflation print only to come back down in response to soothing words from Federal Reserve Chairman Jerome Powell. Let us break down what happened and what to look for in the weeks ahead.
Consumer Prices Are Rising
The Consumer Price Index (CPI) for June showed inflation rising by 5.4% year-over-year, much hotter than expectations and the highest reading since 2008. Inflation is the arch-enemy to bonds and interest rates, so it was no surprise to see long-term Treasury and home loan rates spike higher.
This high reading came one day before Fed Chair Powell was set to speak in front of Congress in his semi-annual testimony on economic conditions and monetary policy.
Heading into the testimony, there was already growing pressure for the Fed to start tapering bond purchases, more specifically MBS purchases, because of inflation fears and froth in the housing market.
Before Mr. Powell took a seat in front of Congress, his prepared speech was released, and he made it very clear the Fed is not going to taper bond purchases just yet despite the higher inflation fears.
There Is Still a Long Way to Go
The Fed has a dual mandate of maintaining price stability (inflation) and to promote maximum employment. They are leaning on the employment side of the mandate when they are saying, There is still a long way to go. With over 9M job openings, the most ever in U.S. history, the Fed is correct. It will take some time to fill millions of jobs.
Mr. Powell also said the Fed is going to talk about tapering in the next couple of meetings. They meet again on July 27th and 28th with the next one in late September. This means the Fed is likely to hold the current course throughout the summer.
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: Less Equals More for Rates

This past week long-term interest rates fell to their lowest levels since mid-February. Let us go through some reasons why rates declined and what it means for the second half of 2021.
From More to Less
The great reopening of the U.S. economy appears to be fizzling. There are still 9.3M open jobs available, which means the labor market is improving, but slowly. The effect of fewer employed means there will be softening economic growth and lower inflation. Bonds love low inflation, and seeing the 10-year note yield hit 1.25% this past week suggests that higher inflation will indeed be transitory.
Another thing we are getting less of is policy response, both from Congress and the Fed. On the former, the original proposal from the White House was another $4 trillion in economic stimulus through the American Infrastructure Plan and American Families Plan. Those proposals are being batted around Congress and will likely end up being a fraction of the original proposal.
On the latter, the Federal Reserve, who has been so accommodative during COVID, will be less so going forward. At the recent Fed meeting, they changed their forecast from initially hiking rates in 2024 to hiking as many as three times in 2023.
And on the bond-buying program, where the Fed has been purchasing at least $40 billion worth of mortgage bonds each month, they will be doing less in the future, and the pressure is on to start tapering. At the last Fed meeting, some Fed members cited a scorching hot housing market as a reason to stop buying mortgage-backed securities.
Return of Familiar Tailwinds
US bond yields are relatively attractive compared to other large bond markets around the globe like Germany and Japan where their 10-year yields are -0.31% and 0.02%, respectively. This helps the U.S. attract investments from around the globe, thereby pushing yields lower.
Bottom line: Markets tend to overshoot to both the upside and downside, meaning this revisit to rates in February could be fleeting. For anyone considering a mortgage, now is the time.

Last Week in Review: Powell Soothes the Markets

This past week home loan rates improved slightly as Fed Chair Jerome Powell was on Capitol Hill sharing the Fed's midyear economic outlook. Let us break down what the Fed Chair said, since his words also pushed stocks higher with the NASDAQ reaching all-time highs.
"Long Way to Go on U.S. Economic Recovery"
The Fed could not be clearer than with this line. IF the economy has a long way to go to recovery, THEN the Fed will not be hiking rates anytime soon and will also not likely taper bond purchases in the near future.
Recent economic readings have shown some signs of weakness and a recent report showed over 9 million job openings. The Fed has a dual mandate of maintaining price stability (inflation) and promoting maximum employment. On the latter mandate, the economy is coming up short, and this gives the Fed cover to not raise rates.
"I Have a Level of Confidence in the Prediction of Transitory Inflation."
The financial markets appear to agree with the Fed. The 10-year note yield at 1.48% is certainly not worried about inflation right now. We will not find out if higher inflation is transitory until later in the year, or even next year, and Powell reiterated this by saying, "It may take some patience to see what is really happening," or as Axl Rose sang, "All we need is just a little patience."
On the inflation front, we all must hope the Fed is correct about high inflation being temporary. Persistent and high inflation is devastating to an economy. Outside of supply chain bottlenecks, which have caused high prices in items and appear to be somewhat temporary, there are components of inflation that appear to be "sticky" and less temporary, like wages and housing. We shall find out if the Fed will get it right. Powell did say it's, "Very, very unlikely the U.S. will suffer 1970's type inflation." For the moment, bond markets and rates seem to agree.
"Optimism About the Path of the Economy and Strong Job Creation"
Recent job creation numbers have been reported beneath expectations, which again gives the Fed reason to hold rates near zero while continuing to purchase bonds.
Bottom line: This is an amazing moment to take advantage of an interest rate environment that is being manipulated by the Fed bond-buying program. This program is now in jeopardy, should economic data come in stronger or hotter than expected. 

Last Week in Review: The Fed Prepares the Markets for Liftoff

This past week the Federal Reserve had their June meeting and prepared the markets for liftoff, meaning when they would hike rates in the future. The initial bond market reaction was negative with both home loan rates and long-term Treasury rates moving higher. Let us break it all down and discuss what to look for in the weeks and months ahead.
The "Talking About, Talking About" Meeting
At the previous Fed meeting in April, the Fed had been forecasting the next rate hike to the Fed Funds Rate would be in 2024. On Wednesday, June 16, the Fed pulled forward those projections and are now seeing the likelihood of the next rate hike in March 2023 followed by as many as two more hikes in 2023.
What Happened?
The Fed acknowledged that inflation may run hotter and be more persistent than originally expected. This is the reason why the Fed may have to hike rates sooner than previously forecasted. While a Fed rate hike has no direct effect on home loan rates, this announcement does influence mortgage rates going forward, but how?
The Fed will have to start tapering bond purchases well in advance of a Fed Funds Rate hike. This means they will slow their bond purchasing program sooner than previously envisioned, which will likely lead to higher mortgage rates sooner than expected. Fed Chair Jerome Powell said the Fed members at the meeting did talk about the notion of tapering. This means the "we are not even thinking about, thinking about" tapering line has been discarded. The Fed is no longer thinking, but discussing, rate hikes and less bond buying.
In trying to calm the markets, more specifically stocks, the Fed did clearly state that any rate hike or change to the bond-buying program will be based on the incoming data in the months ahead. So, while the Fed is preparing the markets for quicker and more rate hikes, it may not happen as soon as March 2023, which, by the way, is still a long time from now.
Moreover, for this to happen, the incoming economic data over the next several months must support the Fed move. This means we must pay close attention to the labor market, economic growth, and inflation readings. If they run hot later this year, we should expect the Fed to come out and say they are about to begin tapering their bond purchases.
Las Wednesday's Fed announcement caused a knee-jerk reaction of lower bond prices, but Thursday we watched prices stabilize, and the 10-year note yield is still hovering at 1.46%, a multi-month low.
Bottom line: This is an amazing moment to take advantage of an interest rate environment that is being manipulated by the Fed bond-buying program. This bond-buying program is now in jeopardy should economic data come in stronger or hotter than expected. If you are considering a refinance or purchase, home loan rates may not improve much or at all from here. Now is a great time to lock.

Last Week in Review: Inflation, Fed, and the Wall

This past week, home loan rates were improving slightly week-over-week until their arch-nemesis, inflation, reared its head. Let us break it all down and talk about what it means for you and your clients.
Consumer Inflation and Looking Ahead
On Thursday, the May Consumer Price Index (CPI) showed that consumer inflation rose by 5.0% year-over-year, and after removing the effects of food and energy, the year-over-year rate of inflation was 3.8%.
While the headline showed that 5.00% inflation might be alarming, the bond market's reaction was a bit restrained. Normally, high inflation numbers would apply heavy selling pressure on bond prices, causing rates to rise. That did not happen. Why?
The bond market is forward-looking. The financial markets were expecting a "hot" inflation reading and have sided with the Fed who continues to say higher inflation over the coming months will be "transitory," or short-term, in nature. Future readings of CPI will be important to follow to see if the high inflation readings do cool down. If they do, rates will remain low and could continue to improve; the opposite is also true.
9.3M Reasons Why the Fed Won't Taper
The Federal Reserve, our central bank, has a dual mandate: maintain price stability (manage inflation/deflation) and promote maximum employment. On the latter, the economy is coming up short on the job creation front. The last two jobs reports came in well beneath expectations, and a recent report shows there are 9.3M jobs available in the economy: a record-high figure. So, we have a lot of work to do to get to maximum employment. If that is the case, it is highly unlikely the Fed will taper their monthly bond purchases anytime soon. The Fed has said they need to see "substantial improvement" toward their dual mandate before tapering. What does that mean for you and your clients? It means that long-term rates are likely to remain lower for a longer time.
Be sure to read the chart section below as we discuss the wall, which has limited rate improvement.
Bottom line: This is an amazing moment to take advantage of an interest rate environment that is being manipulated by the Fed bond-buying program. The Fed will continue to buy bonds and keep rates relatively low for quite a bit longer, but if inflation ticks up in the months ahead, we should expect rates to tick up too.